Raymond F. Collins v. Minister of National Revenue, [1991] 2 CTC 2064

Teskey, T.C.J. [Orally]:—The appellant appeals from an assessment wherein he was assessed pursuant to subsection 227(10) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as a director of R.F. Collins Electrical (1986) Ltd. (1986 Ltd.) for employee deductions that were not remitted.

Issue

The only issue before the Court is whether the appellant exercised the degree of care, diligence and skill to prevent the failure that a reasonable, prudent person would have exercised in comparable circumstances, all as set forth in subsection 227.1(3).

Facts

The Court observed the appellant closely while he was giving evidence and under cross-examination. It finds that he was truthful and forthright in all that he said. The Court without hesitation accepts as truthful his entire statements. In 1985 the appellant operated an electrical business known as R.F. Collins Electrical (1977) Ltd. (1977 Ltd.). By the end of 1985, 1977 Ltd. had used up its full line of credit of a hundred and fifty thousand dollars ($150,000) with the Toronto Dominion Bank. Cash flow and other trade creditors were negligible. At the same time, 1977 Ltd. successfully bid and obtained an electrical contract with Beck Construction Ltd. (Beck), (a general contractor), to supply and install electrical services for the construction of a Sobey's supermarket. The subcontract was for approximately five hundred thousand dollars ($500,000), with an estimated profit of between eighty thousand and a hundred thousand. The appellant knew that he could not perform the contract unless the Toronto Dominion Bank financed it. When first approached, the Bank refused to finance the contract. The appellant went to his supplier of electrical materials and worked out an arrangement which was reduced to writing whereby, in essence, his contract with Beck was amended so that all the appellant company had to do was supply the services, that is, the labour portion of the contract. The supplier, in essence, then had a direct contract for the supply of the goods with Beck. The Toronto Dominion Bank now were prepared to finance the labour portion of the Beck contract. The appellant then incorporated 1986 Ltd., for reasons that are of no concern to this appeal. Both the T.D. Bank and the appellant treated 1986 Ltd. as being in the shoes of 1977 Ltd. The appellant in July of 1986 believed that the agreement with the Toronto Dominion Bank was such that it would finance the gross payroll of 1986 Ltd. for the contract. The appellant was aware of income tax deductions and director's liability for failure to remit. He believed that the bank had agreed to finance the gross labour cost of the Beck contract (which included employee deductions). The bank would not honour any other cheques such as rent and small supplies or wages to the appellant. The contract started around the first part of August 1986. The employees were paid with bank money during August (and thereafter till the contract was completed). The bank refused to advance money to pay the September 15th payment to Revenue Canada. The appellant was in constant contact with the bank and the bank refused to pay the August employee deductions. The bank said it would not pay any employee deductions until the contract was completed. On completion of the contract, Revenue Canada would be paid and the bank loan would be paid down to a hundred thousand dollars ($100,000) (i.e., fifty thousand of the hundred and fifty thousand owed loan and the payroll money advanced by the bank on the Beck contract), and the appellant would receive the difference, estimated at thirty to fifty thousand dollars ($50,000). The bank was receiving all money on the contract from Beck. At the conclusion of the contract, the bank again refused to pay Revenue Canada, took all of the funds, approximately two hundred thousand, and applied it against the total indebtedness of around two hundred and fifty thousand, to reduce the indebtedness down to approximately sixty thousands The appellant believed that the indebtedness should only have been reduced to a hundred thousand, which would have allowed Revenue Canada to be paid in full and give 1986 Ltd. some money to work on with the remaining line of credit of a hundred thousand dollars ($100,000) (reduced down from the previous amount of a hundred and fifty). The bank also exercised their rights under the personal guarantees of the appellant and seized his house and RRSPs at the same time it put 1986 Ltd. out of business.

Analysis

Being satisfied that the appellant believed that he had made an arrangement whereby the employees’ wages (including source deductions) would be paid by the bank, the appellant cannot be held responsible for the August deductions. The remaining question for this Court to determine is, after September 15, 1986, when the bank refused to pay the employee deductions, what would a reasonable, prudent person exercising a degree of care, diligence and skill in comparable circumstances have done. What sets this case apart from the usual case where bank money is being used is that the appellant had estimated the profit on the Beck contract accurately and that profit was realized, approximately seventy-six thousand, when the estimated profit was between eighty and a hundred. The Court arrives at this figure by taking into consideration the bank loan was a hundred and fifty thousand at the start, the employees were paid in full (except for deductions), and the bank ended up with the loan down at sixty thousand. Therefore, there had to be ninety thousand profit. And if the employee deductions had been paid as required, the net would have been approximately seventy-six thousand dollars ($76,000). This, of course, is after interest is paid to the bank on a hundred and fifty thousand dollars ($150,000). This situation is an entirely different matter from the usual case that comes before this Court where matters are going from bad to worse and the company is using the deductions for other purposes. The money was not being used for other purposes and matters did not go from bad to worse. The Toronto Dominion Bank, at best, failed to live up to its alleged agreement. The appellant, having estimated the profit content of the Beck contract accurately, and having performed responsibly and proved that his estimates were correct, the Court would find it very difficult to say the decision on September 15 to carry on was the wrong decision. The Court may well have said it was the wrong decision if the contract had not worked out as estimated. The appellant on September 15 only had two choices, that is, shut the job down or continue. However, with the bank agreeing to pay the deductions from the profit of the contract, the Court believes that the vast. majority of small corporate journeyman directors would have, in comparable circumstances, made the same decision, that is, trust his bankers, who he had had a long outstanding relationship with and produce the profit. This the appellant did. If anyone failed to deduct and remit, it was the Toronto Dominion Bank. It had control, even though it was given to it by the appellant, and they deliberately paid themselves first. They not only paid themselves the money that was advanced for the employee wages from the Beck contract, but also the interest on the former hundred and fifty thousand and ninety thousand of that principal amount. If the appellant's estimate had not proven accurate, I would have dismissed his appeal. However, under the peculiar circumstances herein, and after considering Fancy v. M.N.R., [1988] 2 C.T.C. 2256; 88 D.T.C. 1641, Merson v. M.N.R., [1989] 1 C.T.C. 2074; 89 D.T.C. 22, Clark v. M.N.R., [1990] 1 C.T.C. 2212; 90 D.T.C. 1094, Robitaille v. Canada, [1990] 1 C.T.C. 121; 90 D.T.C. 6059, Champeval v. M.N.R., [1990] 1 C.T.C. 1285; 90 D.T.C. 1291, Herbach v. M.N.R., [1990] 1 C.T.C. 2509; 90 D.T.C. 1354, White v. M.N.R., [1990] 2 C.T.C. 2566; 91 D.T.C. 54, Charkowy v. M.N.R., [1991] 1 C.T.C. 2095; 91 D.T.C. 284, Warner v. M.N.R., [1990] 2 C.T.C. 2575; 90 D.T.C. 87 and Short v. M.N.R., [1991] 1 C.T.C. 2464; 91 D.T.C. 67 I find that the facts of this case sit on the cutting edge of the dividing line between being liable or not, as enunciated by these judgments. When all of these peculiar facts are reviewed, this Court cannot criticize the appellant's actions. This was a one-shot contract. Servicing the Beck contract was the only business being conducted. The appellant was not trying to carry on in a general way. He was salvaging a lucrative contract. He did not intend to nor in any way did he deliberately divert the deductions to anyone else. Since control was assumed by the Toronto Dominion Bank over this company, it relieved the appellant of liability. I am cognizant of the fact that the control was voluntarily given to the bank. That was not a mistake. If a mistake was made by the appellant, it was by not having his banking arrangements in writing. Undoubtedly, the bank would have given it in writing, with an escape clause that it at any month could cease advancing the money. This undoubtedly it would have done in any event, if at any time it felt that the employee wage advances were in jeopardy. Obviously, the appellant quite rightly was able to keep the bank convinced of the validity of the Beck contract and his ability to produce the expected profit. Under the peculiar circumstances of this case, the Court feels obliged to allow the appeal and vacate the assessment. There will be the usual order for costs.

Appeal allowed.