Tremblay,
T.C.C.J.:—These
appeals
were
heard
on
common
evidence
on
July
3,
1991
at
Québec,
Québec.
1.
Point
at
issue
The
question
is
whether
the
appellants
are
correct
in
not
being
considered
jointly
liable
for
a
debt
of
$7,832.08.
The
appellants
were
the
officers
of
the
company
Actif
Ranch
des
Montagnards
Inc.
(hereinafter
referred
to
as
the
ranch)
The
ranch
did
not
forward
to
the
respondents
source
deductions
of
$5,247.72
in
tax
and
$570.09
in
unemployment
insurance.
Further,
and
as
a
consequence,
penalties
and
interest
totalling
the
sum
of
$2,024.27
were
added
to
the
unpaid
deductions.
The
ranch
went
into
bankruptcy
on
April
7,
1988
and
none
of
the
amounts
was
paid
to
the
respondents.
Each
of
the
officers
argues
that
he
was
not
a
consulted
and
active
director.
They
were
not
given
the
financial
statements
for
approval.
Mr.
Michel
Grégoire,
the
company's
principal
shareholder,
was,
according
to
at
least
two
of
the
foregoing
appellants
the
person
who
made
all
the
decisions.
Apparently,
he
even
decided
unilaterally
to
file
a
proposal
on
the
company's
behalf
although
the
shareholders
and
directors
were
opposed
to
doing
so.
2.
Burden
of
proof
2.01
The
appellants
have
the
burden
of
showing
that
the
respondents's
assessments
are
incorrect.
This
burden
of
proof
results
from
several
judicial
decisions,
including
a
judgment
of
the
Supreme
Court
of
Canada
in
Johnston
v.
M.N.R.,
[1948]
S.C.R.
486,
[1948]
C.T.C.
195,
3
D.T.C.
1182.
3.
Facts
3.01
The
facts
entered
in
evidence
in
this
case
may
be
summarized
as
follows.
The
Ranch
des
Montagnards
Inc.
is
a
company
incorporated
on
January
25,1977
pursuant
to
Part
I
of
the
Quebec
Companies
Act
and
continued
on
April
7,
1981
pursuant
to
Part
I-A
of
the
Quebec
Companies
Act.
3.02
The
ranch's
activities
consisted
of
arranging
pony
trekking
with
accommodation
for
tourists
and
people
in
the
Témiscouata
region
(Auclair,
Cabano
and
Dégelis).
Clearly,
this
was
a
seasonal
business.
During
the
period
from
1981
to
1988,
the
ranch
owned
up
to
40
horses
and
employed
12
to
15
persons
(guides,
stable-men,
and
so
on).
Operations
began
on
the
land
of
Michel
Grégoire's
father.
It
all
began
in
1976
even
before
the
ranch
was
incorporated,
but
the
appellant
Jocelyne
Lévesque,
wife
of
Michel
Grégoire,
noted
that,
at
that
time,
it
was
mostly
for
pleasure.
When
the
ranch
was
incorporated,
Michel
Grégoire
was
the
principal
shareholder
and
his
wife
and
sister
minority
shareholders.
The
evidence
did
not
give
a
breakdown.
Later,
in
about
1980,
shares
were
sold
to
seven
or
eight
other
shareholders.
In
about
1984
or
1985,
seven
shareholders
borrowed
$25,000
from
the
Caisse
populaire
and
the
appellants
still
have
to
pay
amounts
owed
to
the
Caisse.
A
3,000-acre
piece
of
land
was
bought
with
the
help
of
the
Office
du
crédit
agricole.
Five
small
cabins
were
built.
There
was
also
a
restaurant
and
stables
for
the
horses.
The
minutes
of
November
4,
1985
(Exhibit
1-2)
contain
certain
information
on
the
financial
side:
On
the
financial
side,
the
Quebec
Planning
and
Development
Bureau
agrees
to
participate
in
the
amount
of
$60,000,
the
CLE
company
for
$25,000;
the
amount
of
$118,000
from
the
Office
du
crédit
agricole
still
has
to
be
confirmed,
while
an
amount
of
$7-10,000
for
a
commercial
study
and
$20,000/year
for
three
years
from
the
ministère
de
l'expansion
industrielle
régionale
seems
certain.
However,
these
contributions
are
conditional
on
each
other.
3.03
According
to
the
appellant
Micheline
Lévesque,
the
only
one
of
the
three
appellants
who
appeared
to
be
aware
of
the
financial
ups
and
downs,
the
difficult
period
was
from
November
of
one
year
to
May
of
the
next,
during
which
there
was
no
income
and
the
horses
had
to
be
fed
and
the
staff
paid.
It
cost
$25,000.
Gross
income
from
operations
was
some
$125-150,000
a
year.
The
financial
problems
began
in
the
fall
of
1986,
apparently,
due
to
a
drop
in
business
because
of
unfavourable
weather.
3.04
The
various
minutes
of
meetings
held
by
the
ranch's
board
of
directors
between
November
4,
1985
and
May
19,
1987
are
set
out
in
Exhibit
1-2.
This
indicates
that
the
three
appellants
in
the
instant
case
were
in
fact
directors
during
September
to
December
1986
and
January
and
February
1987,
that
is
the
periods
when
the
source
deductions
were
not
submitted.
However,
neither
in
the
minutes
of
November
18,
1986
nor
in
those
of
February
24,
1987
is
there
any
mention
that
source
deductions
were
not
paid.
Illiquidity
is
mentioned
(November
18,1986)
and
one
Lauréat
Caron
is
authorized
“to
collect
subscriptions
from
the
equestrian
tourism
investment
and
economic
development
movement"
(February
24,
1987).
3.05
The
minutes
of
March
16,
1987
contained
a
resolution
in
due
form
proposed
by
Laurent
Grondin,
seconded
by
Léopold
Lemay
and
adopted
unanimously,
to
file
a
proposal
under
the
Bankruptcy
Act.
These
minutes
are
signed
by
Michel
Grégoire
and
Micheline
Lévesque.
3.06
The
two
appellants
Léopold
Lemay,
a
lumberjack
who
worked
as
a
stable-man
for
the
ranch,
and
Laurent
Grondin,
an
investment
consultant
who
worked
as
a
guide,
deny
that
such
a
resolution
was
passed.
On
the
contrary,
at
a
meeting
in
early
March
(probably
the
17th)
everyone,
directors
and
shareholders,
was
unanimously
opposed
to
such
a
proposal.
3.07
The
appellant
Micheline
Lévesque
stated
in
her
notice
of
appeal
what
she
also
said
in
her
testimony:
At
one
point,
an
advertising
company
sent
the
business
a
formal
demand,
which
alerted
other
creditors
such
as
the
Office
du
crédit
agricole.
In
order
to
continue
operations,
my
husband
went
to
see
a
trustee,
who
suggested
the
proposal.
This
was
to
enable
us
to
draw
up
a
work
around
plan
so
we
could
go
on
operating.
It
meant
that
the
creditors
covered
by
this
arrangement
were
all
on
the
same
footing
and
we
could
not
pay
Revenue
Canada
before
any
of
the
others.
Then,
as
regards
to
the
degree
of
diligence
in
taking
action,
it
seems
to
me
the
situation
was
beyond
our
control
even
with
the
best
of
intentions.
3.08
This
proposal
took
effect
in
early
April
1987.
During
the
following
year,
according
to
Mrs.
Lévesque,
the
directors
thought
the
problem
could
be
solved.
An
application
for
a
loan
was
made
to
the
Office
du
crédit
agricole,
probably
near
the
end
of
the
winter.
3.09
On
April
7,
1988,
when
the
arrangement
expired,
there
was
a
meeting
with
the
trustee
and
the
creditors
to
decide
whether
they
should
continue
the
arrangement
or
go
into
bankruptcy.
Michel
Grégoire
asked
that
any
decision
be
delayed
until
June
21,
when
the
activities
of
the
ranch
would
have
started
and
a
reply
had
been
received
from
the
Office
du
crédit
agricole.
Agreement
by
all
the
creditors
was
necessary
for
this
extension.
All
the
creditors
did
agree,
except
the
Department
of
National
Revenue.
It
objected
to
the
arrangement.
Bankruptcy
was
declared
on
April
7,
1988.
3.10
Mr.
Grégoire
and
Mrs.
Lévesque
subsequently
were
told
that
an
employee
from
the
loans
section
of
the
ministère
de
I'Agriculture
had
recommended
a
loan
of
$50,000.
According
to
Mrs.
Lévesque,
the
ranch's
debts
amounted
to
over
$100,000.
Reservations
made
for
the
1988
summer
period
were
cancelled.
3.11
The
ranch
owed
the
Department
of
National
Revenue
the
sum
of
$7,832.08,
consisting
of
income
tax
deductions
and
unemployment
insurance
contributions
for
September
to
December
1986
and
January
and
February
1987,
together
with
related
penalties
and
interest.
|
Tax
|
$5,247.72
|
|
Unemployment
insurance
|
570.09
|
|
Penalties
and
interest
|
2,014.27
|
|
Total
|
$7,832.08
|
3.12
On
July
13,
1988
the
Department
of
National
Revenue
filed
its
proofs
of
claim
with
the
ranch's
bankruptcy
trustee
(Exhibit
1-1).
3.13
The
three
appellant
directors
said
that
they
were
all
unaware
that
they
were
personally
liable
for
the
unpaid
deductions.
Mrs.
Lévesque
stated
that
she
had
been
part
of
the
company
since
1977
and
had
never
been
told
about
this.
The
directors
did
not
learn
of
it
until
after
the
bankruptcy,
when
they
got
a
letter
from
the
respondent.
3.14
Mr.
Lemay
and
Mrs.
Lévesque
testified
that
it
would
undoubtedly
have
been
possible
to
sell
horses
to
pay
the
respondent's
debt.
3.15
The
appellants
Grondin
and
Lemay
said
that,
for
all
practical
purposes,
the
ranch
was
controlled
by
the
majority
shareholder
Michel
Grégoire
and
any
administrative
decision
was
taken
by
him
and
his
wife
Micheline
Lévesque.
They
said
they
had
never
seen
the
financial
statements
or
approved
them.
3.16
Micheline
Lévesque's
version
given
in
Court
is
well
summarized
in
the
notice
of
appeal
:
I
was
a
small
minority
shareholder,
as
I
did
not
join
with
my
husband
[until]
1977,
as
well
as
his
sister,
to
establish
this
company,
because
at
that
time
the
province
required
a
minimum
of
three
people.
My
husband
had
already
been
operating
in
his
own
name
since
1973,
but
since
he
intended
to
increase
his
herd
of
horses
to
offer
long
riding
holidays,
he
was
advised
to
incorporate
in
order
to
protect
himself
from
possible
legal
action
in
the
event
of
an
accident
or
some
such
thing.
I
therefore
let
him
use
my
name
only
to
help
him
because
since
1967
I
had
a
job
outside
in
addition
to
looking
after
our
two
children,
and
had
no
intention
of
working
in
the
company
as
I
had
no
time
or
interest
in
doing
so.
The
notary
warned
us
to
take
notes
for
major
decisions.
That
was
the
work
I
did
from
the
start:
I
wrote
up
minutes.
Therefore,
when
the
company's
financial
situation
worsened
in
1986,
my
husband
was
still
working
very
hard
to
rectify
the
situation
by
marketing
efforts,
advertising
and
financing,
and
as
a
result
there
was
little
time
to
hold
meetings
of
the
board
of
directors.
I
was
therefore
never
told
of
the
situation
at
a
meeting
or
any
other
time.
Mrs.
Lévesque
admits,
however,
that
it
was
she
and
her
husband
Michel
Grégoire
who
signed
the
ranch's
cheques.
4.
Act—Case
of
Law—Analysis
4.01
Act
The
provisions
of
the
Income
Tax
Act
involved
in
the
instant
case
are
subsections
227.1(1),
(2)
and
(3).
They
read
as
follows:
227.1
(1)
Where
a
corporation
has
failed
to
deduct
or
withhold
an
amount
as
required
by
subsection
135(3)
or
section
153
or
215,
has
failed
to
remit
such
an
amount
or
has
failed
to
pay
an
amount
of
tax
for
a
taxation
year
as
required
under
Part
VII
or
VIII,
the
directors
of
the
corporation
at
the
time
the
corporation
was
required
to
deduct,
withhold,
remit
or
pay
the
amount
are
jointly
and
severally
liable,
together
with
the
corporation,
to
pay
that
amount
and
any
interest
or
penalties
relating
thereto.
(2)
A
director
is
not
liable
under
subsection
(1),
unless
(a)
a
certificate
for
the
amount
of
the
corporation's
liability
referred
to
in
that
subsection
has
been
registered
in
the
Federal
Court
of
Canada
under
subsection
223(2)
and
execution
for
such
amount
has
been
returned
unsatisfied
in
whole
or
in
part;
(b)
the
corporation
has
commenced
liquidation
or
dissolution
proceedings
or
has
been
dissolved
and
a
claim
for
the
amount
of
the
corporation’s
liability
referred
to
in
that
subsection
has
been
proved
within
six
months
after
the
earlier
of
the
date
of
commencement
of
the
proceedings
and
the
date
of
dissolution;
or
(c)
the
corporation
has
made
an
assignment
or
a
receiving
order
has
been
made
against
it
under
the
Bankruptcy
Act
and
a
claim
for
the
amount
of
the
corporation's
liability
referred
to
in
that
subsection
has
been
proved
within
six
months
after
the
date
of
the
assignment
or
receiving
order.
(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.
4.02
Case
Law
Counsel
for
the
respondent
referred
the
Court
to
the
following
unreported
cases:
1.
Richard
Wilson
v.
M.N.R.,
87-1207
(T.C.C.),
rendered
on
February
23,
1988
by
Judge
Kempo;
2.
Graham
Keast
v.
M.N.R.,
90-207
(T.C.C.),
rendered
on
August
23,
1990
by
Judge
Rip.
4.03
Analysis
4.03.1
It
is
admitted
that
source
deductions
were
not
paid
to
the
respondents
during
the
period
from
September
1986
to
February
1987,
amounting
to
$5,247.72
(paragraph
3.12).
It
is
also
not
in
dispute
that
the
three
appellants
were
directors
of
the
ranch
during
this
period
from
September
1986
to
February
1987
(paragraph
3.05).
4.03.2
The
formalities
regarding
the
ranch's
bankruptcy
mentioned
in
subsection
227.1(2)
of
the
Act
were
also
observed
and
the
respondents
sent
their
claim
to
the
trustee
within
the
specified
deadline
(paragraph
3.12),
although
the
appellants
maintain
that
the
deadline
was
not
observed.
4.03.3
The
point
is
whether
the
appellants
"exercised
the
degree
of
care,
diligence
and
skill
to
prevent
the
failure
that
a
reasonably
prudent
person
would
have
exercised
in
comparable
circumstances”,
as
in
subsection
227.1(3).
4.03.4
The
balance
of
evidence
is,
first,
that
two
of
the
three
appellants,
Messrs.
Grondin
and
Lemay,
though
they
were
directors,
did
not,
in
fact,
participate
in
everyday
administration
(paragraph
3.15).
The
evidence
even
indicates
that
the
majority
shareholder
Michel
Grégoire,
who
was
the
real
director,
did
not
carry
out
the
decisions
of
the
board
of
directors.
Indeed,
he
forged
a
resolution
from
scratch
authorizing
the
filing
of
a
proposal
(paragraph
3.05)
when
the
shareholders
and
directors
were
opposed
to
doing
so
(paragraph
3.06).
The
Court
must
also
believe
Messrs.
Grondin
and
Lemay
when
they
contend
that
they
never
saw
the
ranch's
financial
statements
and
did
not
approve
them.
Indeed,
Exhibit
1-2,
consisting
of
the
ranch's
minutes
from
November
1985
to
May
18,
1987,
does
not
show
the
financial
statements
to
the
shareholders:
these
financial
statements
only
appear
in
the
minutes
for
May
18,
1987,
which
was
after
the
proposal.
As
the
accounting
firm
which
prepared
the
financial
statements
is
the
one
to
which
the
trustee
appointed
to
direct
the
proposal
belonged,
it
appears,
at
first
sight,
that
this
was
the
only
time
the
shareholders
saw
a
financial
statement,
that
is,
after
the
period
when
source
deductions
payments
were
in
default
and
the
proposal
was
under
the
trustee's
control.
4.03.5
In
her
testimony,
Mrs.
Lévesque
said
that
in
the
difficult
period
from
September
1986
onwards,
her
husband
was
very
busy,
and
so
there
was
no
time
to
hold
a
directors’
meeting
(paragraph
3.16)
This
seems
to
me
yet
another
reason
to
conclude
that
the
appellants
Grondin
and
Lemay
could
not
be
regarded
as
aware
of
day-to-day
matters.
The
Court
is
surprised
to
find
that,
at
the
investigation,
Mr.
Michel
Grégoire
was
not
present
to
throw
a
little
more
light
on
the
question.
4.03.06
Based
on
all
these
facts,
the
question
before
the
Court
is:
Were
Mr.
Grondin,
a
guide,
and
Mr.
Lemay,
a
lumberjack
and
a
stable-man,
in
a
position
to
exercise
diligence
within
the
meaning
of
s.
227.3
[s/c]
?
The
Court
comes
to
the
conclusion
that
they
were
"puppet"
directors
and
cannot
be
made
subject
to
the
liability
mentioned
in
subsection
227.1(1).
4.03.7
Is
the
same
true
of
the
appellant
Micheline
Lévesque?
Unfortunately,
I
cannot
say
that
she
was
kept
in
ignorance
of
the
facts,
as
from
the
ranch's
beginnings
and
even
before
that
she
participated
in
its
operations
(paragraph
3.13)
she
signed
cheques
with
her
husband
(paragraph
3.16),
the
principal
shareholder
and
manager
of
the
entire
business,
and
she
signed
as
secretary
of
the
resolution
regarding
the
proposal
(paragraph
3.05).
On
the
evidence
I
cannot
conclude
that
she
was
unaware
of
the
essential
facts
which
could
preclude
her
liability
under
subsection
227.1(1).
4.03.8
As
the
Court
has
no
jurisdiction
to
dispose
of
the
part
of
the
appeal
relating
to
unemployment
insurance
contributions
and
the
penalties
and
interest
relating
thereto,
it
must
dismiss
that
part.
5.
Conclusion
The
appeals
of
the
appellants
Grondin
and
Lemay
are
allowed
and
the
appeal
of
the
appellant
Lévesque
is
dismissed.
Appeals
of
Grondin
and
Lemay
allowed;
appeal
of
Lévesque
dismissed.
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