Russell J. Adey v. Minister of National Revenue, [1991] 2 CTC 2157, 91 DTC 964

Taylor, T.C.J.: —This is an appeal heard in Winnipeg, Manitoba, on April 29, 1991, against an assessment dated April 20, 1989 under subsection 227(10) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The above assessment also included amounts with reference to the Manitoba Income Tax Act, Canada Pension Plan and the Unemployment Insurance Act, but the only matter at issue in this appeal is that part of the assessment dealing with employees' income tax deductions covered by section 153 of the Act.

The notice of appeal read as follows:

I am writing on behalf of myself (Russell J. Adey) to object to a “Notice Of Assessment #1858" received from the Winnipeg Taxation Office April 20, 1989 and a subsequent refusal of my “Notice Of Objection” received from your Winnipeg office March 12, 1990.

Since filing the objection dated July 17, 1989 another important fact has come to light which I have listed below under #2. I would also like to clarify my position as taking "Due Diligence” to pay Shamrock Printing Co. Ltd.’s obligations:

1. In the summer of 1988, as sole owner and director of R-Jay Industries Ltd., I contacted 16 acquaintances of mine in an attempt to raise $200,000 to pay all of Shamrock's debts, including the $19,908.40 owing the taxation office. The 16 names are available upon request. Is this not considered taking "Due Diligence" to meet Shamrock's obligations?

2. I also made a statement that I didn"t know I was a director of Shamrock Printing Co. Ltd. and have since obtained a copy of the minutes of the meeting I was supposed to be at (I don’t think I was) and my signature does not appear on the minutes.

The respondent in the reply to the notice of appeal noted:

—at all relevant times, the appellant was a director and shareholder of Shamrock Printing Co. Ltd., herein after called the Company;

—the Company made an assignment in bankruptcy under the Bankruptcy Act on December 7, 1988;

—at that time the Company had a liability for unremitted payroll deductions for the period of December 1987 to July 1988 in the following amount:

Federal Tax	$9,751.32
Provincial Tax	5,289.93
Canada Pension Plan	1,386.72
Unemployment insurance	1,906.03
Interest and Penalties	1,574.40
Total	$19,908.40

—the appellant did not exercise a degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure of the Company to remit source deductions.

Evidence

Mr. Adey was a forthright witness on his own behalf, apparently astonished to find himself the subject of inquiry, in a situation in which he held he was not and never had been a director of Shamrock Printing Co. Ltd. (Shamrock). It was clear from his notice of appeal, supra, that he was not totally naive or unlearned in business practices generally. He rested his entire case on the perception that he had never given his consent to being a director of Shamrock, had never been formerly advised that he held such a position, and mainly that he had never signed the Company minutes to that effect. At the same time Mr. Adey seemed quite unaware of what process should have been followed under which he would have been a director, nor did he know the duties he might have fulfilled—in addition to those he acknowledged—which could confirm such a role.

I would refer to some expressions used by Mr. Adey in filing his notice of appeal :

"As a silent partner" and not an active participant in Shamrock Printing Co. Ltd.

“Half owner of Shamrock Printing Co. Ltd."

The main item of physical evidence that, in his view, should be regarded as confirming that he was not a director, was the fact that he had not signed any of the Company minutes at all, even though these minutes regularly referred to him as a director. The minute book of the Company was submitted. The contrast in his position with that demonstrated by his conduct was highlighted by counsel for the respondent. Mr. Adey had paid $20,000 to a Mr. Gerald Adams for Mr. Adams' 50 per cent shareholdings in Shamrock in April 1985; he had accepted the position of Secretary Treasurer of the Company at that time; and he had acquired signing authority on the Company bank accounts. Mr. Adey did state that he had assumed management of Shamrock in about July 1988—ostensibly when Mr. Brathwaite had gone on holidays—and had continued in that role until about November 1988, at which time it was obvious that the Company's financial difficulties could not be overcome. According to Mr. Adey, he had not engaged himself at all in the operation or management of Shamrock during the three years 1985 to 1988, stating quite simply that he had left everything in the hands and control of Mr. Brathwaite (who testified later). Mr. Brathwaite had assumed the position of president—with the agreement of Mr. Adey in April 1985 at the time of the purchase by Mr. Adey of Mr. Adams' 50 per cent shareholdings—Mr. Adams prior to that being president, with Mr. Brathwaite as secretary treasurer. There is no question—according to the testimony of Mr. Adey—that Mr. Brathwaite had virtual "carte blanche” with regard to the operations and management of Shamrock. Mr. Adey put forward his "hands off” approach as a major point in his favour, but I shall return to it later. Mr. Adey did agree that he spoke to Mr. Brathwaite on occasion—but not frequently—and was sometimes informed of the general state of affairs at. Shamrock—usually that sales were good, or had gone uP or down. Mr. Adey indicated no knowledge or information regarding such things as financial statements, corporate returns for governments, etc.

Mr. James Brathwaite was called by Mr. Adey, and in answer to questions both from Mr. Adey and counsel for the respondent stated that upon Mr. Adey acquiring Mr. Adams' 50 per cent shareholdings in April 1985, he (Mr. Brathwaite) had asked him (Mr. Adey) if he wanted to be president, and receiving a negative answer, or at least not a positive answer, assumed that role himself and agreed that Mr. Adey become secretary treasurer—Mr. Brathwaite's former role. Mr. Brathwaite agreed with the statement of Mr. Adey that he (Mr. Brathwaite) was to be in total control of Shamrock; that Mr. Adey was in his term a “silent partner"; and that irrespective of the information contained in the Company minutes, no real meetings were ever held. The technical matters pertaining to such meetings—dates, elections, etc.—were left strictly to the Company lawyer—a Mr. Slusky. Mr. Brathwaite did not exhibit much regard for the legal and legislated requirements or responsibilities of corporations, or directors and officers of corporations. He is an accountant by profession. He has recently declared personal bankruptcy and is awaiting the administration of those affairs. His recollection of the entry of Mr. Adey into the Company was by way of a cheque for $20,000 left with him by Mr. Adey with the instructions that it would be turned over to Mr. Adams when the transfer requirements and technicalities had been completed. Mr. Adams' 50 per cent shareholdings, (one issued share) was cancelled and a new share dated April 30, 1985 was issued to Mr. Adey. That new share (which is in the minute book) is not signed by anyone—Adams, Brathwaite or Adey.

Mr. Irvine Slusky was called as a witness by the respondent and stated that he had only seen or dealt with Mr. Adey once or twice, the information and direction regarding the Company affairs—including that pertaining to officers and directors coming from Mr. Brathwaite. One critical piece of evidence which was submitted by the respondent—a copy of the "Return of Information and Particulars” for the annual return of the Province of Manitoba gave Mr. Slusky's office address for mail service. Information contained in the exhibit listing Mr. Adey as a director came from Mr. Brathwaite, to the best of the recollection of Mr. Slusky, and showed that Mr. Adey had replaced Mr. Adams at April 1985 as such. The document was dated January 7, 1987 and was signed by Mr. Brathwaite as president, after being prepared by Mr. Slusky.

Argument

Counsel for the respondent made reference to the current state of the case law dealing with directors liability under these circumstances, particularly noting James White v. M.N.R., [1990] 2 C.T.C. 2566; 91 D.T.C. 54, and Irvine v. M.N.R., [1990] 2 C.T.C. 2560; 91 D.T.C. 91. I would note the following from Irvine, supra, at page 2563 (D.T.C. 93-94):

In this matter, the basic position of Irvine is that he was not and had never been a director of Centaur, and barring evidence to the contrary that simple statement given under oath—that he had never been a director—might be taken at face value normally. The problem is, as I have noted above, his own knowledge, consent, or acquiescence to being a director, does not appear to be a prerequisite according to Saskatchewan legislation. That would be a difficult call indeed—in a director's liability case—if the only evidence was the sworn statement of the taxpayer.

and from White, supra, at page 2574 (D.T.C. 60):

Obviously, I see no merit in the more liberal viewpoint tentatively put forward by counsel for the respondent (above) that the Court might consider three classifications of "director"—nominal, passive and active. The situation, as I read it, leaves no room for such interpretation, even though the Minister's compassion and consideration in suggesting it might well be appreciated by appellants.

Counsel also provided the Court with certain definitions from the Canada Business Corporations Act, since, (admittedly to counsel's surprise) Shamrock had been a federal, not a provincially incorporate company:

"director", "directors" and “board of directors".—"director means a person occupying the position of director by whatever name called and "directors" and "board of directors” includes a single director.

and

(1) Power to manage.—Subject to any unanimous shareholder agreement, the directors shall manage the business and affairs of a corporation.

(2) Number of directors.—A corporation shall have one or more directors but a corporation, any of the issued securities of which are or were part of a distribution to the public and remain outstanding and are held by more than one person, shall have not fewer than three directors, at least two of whom are not officers or employees of the corporation or its affiliates.

Analysis

In the end analysis there is only one question to answer—whether Mr. Adey was a director under the circumstances of this appeal.

First I wish to note several pertinent references to Shamrock contained in the first director's meeting “held” on October 15, 1984:

Number and Quorum: Subject to any Special Resolution changing the number of Directors, the Board of Directors shall consist of two individuals. Two Directors present at a meeting shall constitute a quorum.

Election: Directors shall be elected by the Shareholders at each Annual Meeting of the Shareholders on a show of hands, unless a poll is demanded, and if a poll is demanded such election shall be by ballot.

Meetings of Directors: A Director's meeting may be called upon one (1) days' notice, in writing, or by telephone, by either the President or any 2 Directors of the Company. Any meeting of Directors may be held at any place and time without such notice if all the Directors are present or if a quorum is present, and those Directors who are absent have signified their consent, in writing, to the holding of the meeting in their absence or subsequently thereto signify their consent thereto, in writing, and any Resolution passed or proceeding had or action taken at such meeting shall be as valid and effectual as if it had been passed or taken at a meeting duly called. Notice of any meeting or any irregularity in any meeting or in the notice thereof may be waived by any Director.

A Director shall be considered present at a meeting of the Directors if he is able to participate in the meeting by telephone or other communication facilities as contemplated by Section 109(9) of the Corporations Act.

For the first meeting of the Board of Directors to be held immediately following the election of Directors at an Annual or General Meeting of Shareholders or for a meeting of the Board of Directors at which a Director is appointed to fill a vacancy in the Board, no notice of such meeting shall be necessary to the newly elected or appointed Director or Directors in order for the meeting to be duly constituted, Provided that a quorum of Directors be present.

I will not recite much of the detail contained in the minutes of the corporation from April 30, 1985 because of the position adopted by Mr. Adey, and because the minutes presented in Court were either all unsigned, or signed only by Mr. Brathwaite. The minutes prior to that time appeared to all be signed appropriately by both Mr. Brathwaite and Mr. Adams when they were the two shareholders and directors. Contained in the minute book is an undated, but signed resignation of Gerald Adams as a director—"effective the 24th day of May, 1985”. The most crucial set of minutes after April 30, 1985 was with reference to meetings “held” apparently on 26th of November 1985 at which time the record shows:

Minutes of an annual meeting of the Board of Directors of Shamrock Printing Co. Ltd. held at 1212-363 Broadway, Winnipeg, Manitoba, on the 26th day of November, 1985 at the hour of 10:00 o'clock in the forenoon.

Present: Gerald Adams

William Edwin James Brathwaite

being all the Directors of the Corporation.

The President took the chair and the Secretary acted as Secretary of the meeting.

All the Directors being present And all Directors having waived notice of the calling of the meeting, the meeting was declared to be regularly constituted.

The minutes of the last meeting were read and directed to be signed as correct.

The President then advised the meeting that Gerald Adams had effected a sale of his share and interest in the company to Russell Adey effective April 30, 1985 and had resigned his Directorship that day.

Mr. Adey then entered the meeting and tendered the share of Gerald Adams which had been assigned by Mr. Adams and requested that the same be cancelled and that a new Share Certificate be issued in his name. Mr. Adey, having the necessary share qualifications, was then elected a Director and appointed Secretary of the Corporation in the place and stead of Gerald Adams.

These minutes are totally unsigned—by any one of the three shareholders, past, present or in between. Minutes of subsequent meetings—showing Mr. Adey as a director—and present, are signed only by Mr. Brathwaite. It is difficult to imagine how the resignation of Mr. Adams as a director "effective the 24th of May 1985” could be the page immediately preceding the totally unsigned set of minutes allegedly referring to meetings held on “26th of November 1985” showing Mr. Adams still as a director and participating in the meeting, at least to the extent of transferring shares, directorship and responsibility to Mr. Adey.

Taking into account Mr. Brathwaite's stated position that meetings—in the formal sense—were not held, and Mr. Slusky's agreement that he received its directions and information for the preparation of minutes, documents, etc. from Mr. Brathwaite, I simply put no faith whatever in the "minute book” record presented as evidence by Mr. Adey. In addition to not showing the signature of Mr. Adey—the main point on which he relies—there is a great deal more that they do not show. I do not know when or how they were prepared, but they serve no useful purpose in this matter, other than to raise additional questions. In Mr. Adey's view the minutes—as filed with the Court—do not prove he was a director, as he portrays that designation. In my view, the minutes do not prove that he was not a director, no matter how confusing or incomplete they are, and if anything at all they tend to show that indeed he was a director, taking the place of Mr. Adams.

But, in my opinion, the question of whether he was a director in this appeal stands to be decided on quite a different point. Counsel for the respondent has outlined in argument the contradictions between the known conduct of Mr. Adey, and his stated position he was not a director. But, Mr. Adey, as I see it, had completely abandoned any position of "not a director" to which he can now retreat, by giving Mr. Brathwaite "carte blanche" for the affairs of Shamrock. I have considerable reservations that Mr. Adey distanced himself to quite the degree he now maintains—but the testimony from Mr. Brathwaite is in support of that proposition—that Mr. Adey (through Mr. Brathwaite) paid Mr. Adams $20,000. for the 50 per cent (one share) part of the corporation; that he became secretary treasurer; that he took bank signing authority; and then in effect told Mr. Brathwaite to run the Company without restraint and little consultation. That is hard to accept—as counsel for the respondent contended—but that being the situation, Mr. Brathwaite was perfectly able and empowered by the Company by-laws, by Mr. Adey, and as I understand it by the Canada Business Corporations Act, to name him in as a director and act as if he was indeed a director. At least it is a perfectly legitimate position for the respondent to take in striking this assessment, that Mr. Adey was "a person occupying the position of director by whatever name called (see Canada Business Corporations Act), and that Mr. Adey was a director in law and in fact. Whether he had actually in physical terms ever agreed to be a director, or whether he signed the highly questionable minute book are irrelevant considerations for me. The statement I made in Irvine, supra, holds true: "That would be a difficult call indeed—in a director's liability case—if the only evidence was the sworn statement of the taxpayer."

But here, just as in Irvine, supra, there is the other substantive evidence noted above to contradict the claim that he was not a director.

It is not for the Court to find a smooth path through which all the confusing and contradictory thickets arising out of the corporate record keeping, and operations of this Company, can be traversed so that the Court can somehow agree that Mr. Adey was not a director. It is for Mr. Adey to prove, on the balance of probability, that his situation and conduct did not fulfil the requirements of a director against the evidence that he was a director. In my view he has not done so. The appeal is dismissed.

Appeal dismissed.