Hugh M. Snow v. Minister of National Revenue, [1991] 2 CTC 2198, 91 DTC 832

Brulé, T.C.J.:— This appeal results from an assessment by the Minister against the appellant who was a director of Granville Ltd. at the time it was required to pay certain amounts of source deductions which were not paid.

Facts

The facts may best be put forth in some detail by following some of the assumptions made by the respondent. Essentially these are found in the reply to notice of appeal and quoted as follows:

4, (a) At all relevant times the Appellant was a director of Granville Ltd., a body corporate, organized and existing under the laws of the Province of Nova Scotia;

(b) In 1985 the respondent initiated a Payroll Investigation of Granville Ltd. as a result of a complaint received from a former employee of Granville Ltd. that she had never received a T-4 slip for 1984;

(c) As a result of the investigation, it was determined that, since 1982, Granville Ltd. had prepared T-4 slips for its employees each year and had issued many separation certificates using the payroll account number of another corporation in whose payroll the employees of Granville Ltd. had not been included;

(d) Since 1982, a payroll account had never been set up for Granville Ltd. and no payroll remittances had been made by it;

(e) On December 4, 1985, an assessment was issued against Granville Ltd. by the respondent for the amounts of federal income tax, provincial income tax, Canada Pension Plan contributions and Unemployment Insurance premiums deducted and withheld from employees' wages and salaries in 1982, 1983, 1984 and January to October (inclusive), 1985, which amounts were not remitted to the Receiver General of Canada as and when required by the Income Tax Act, plus penalties and interest assessed thereon;

(f) Granville Ltd. was unable to produce books and records for 1982, 1983 or 1984 and, therefore, the assessment referred to in subparagraph (e) above included estimates for these years, which amounts were extrapolated from Granville Ltd.'s records available for January to October, 1985, which estimates the respondent determined were reasonable in the circumstances;

(g) Subsequent to December 4, 1985, the respondent obtained the following information in relation to the amounts assessed to Granville Ltd. on that date:

(i) Payment on account of Granville Ltd.'s payroll deductions was received on December 13, 1985 in the amount of $1,461.33, which amount was applied by the respondent to the 1982 balance;

(ii) an examination of the T-4 slips issued by Granville Ltd. for 1985 revealed that

the assessment for that year was insufficient in the following amounts:

Federal Tax	$248.86
Provincial Tax	149.59
CPP	126.48
Ul	343.38
Total	$859.31
This amount was assessed to Granville Ltd. on May 1, 1986;

(h) On February 13, 1987, the Appellant was assessed as a director of Granville Ltd. for unremitted payroll deductions in the amount of $35,202.41, calculated as follows:

Granville Ltd. Assessments

December 4, 1985	$35,759.42
May 1, 1986	859.31
Payment received Dec. 13, 1985	( 1,461.33)
Interest	45.00
Total Assessed	$35,202.40

(i) In response to the Notice of Objection filed with the respondent by the Appellant, the respondent re-examined the estimates in relation to the 1982, 1983 and 1984 taxation years and determined the following:

(i) a review of all the T-4 slips that could be located indicated that a total of at least $5,169.54 ought to have been remitted by Granville Ltd. in 1984 and, though the respondent could not determine if this represented all of the deductions made, he satisfied himself that this represented a reasonable amount of remittances for 1984;

(ii) as only one T-4 slip issued by Granville Ltd. in 1983, representing total remittance of $243.08 could be located, the respondent satisfied himself that 80% of the 1984 remittances would be a reasonable remittance amount for 1983;

(iii) as no T-4 slips issued by Granville Ltd. could be located for 1982, the respondent satisfied himself that 80% of the 1983 remittances would be a reasonable remittance amount for 1982;

(j) Based on the determinations detailed in subparagraph (i) above, Granville Ltd. failed to remit federal income taxes deducted and withheld from employees' wages and salaries to the Receiver General as follows:

Year	Amount not Remitted
1982	$2,114.06
1983	2,642.66
1984	1,787.89
1985	2,053.88
	$8,598.49

(k) On December 10, 1985, Granville Ltd. was placed into bankruptcy by the Continental Bank of Canada, and Coopers & Lybrand Ltd. was appointed as Trustee;

(l) The respondent filed a Proof of Claim with the Trustee in Bankruptcy dated January 6, 1986 for the amount of Granville Ltd.'s liability as detailed in paragraph 4(e), above;

(m) The Appellant was an incorporating director of Granville Ltd. in 1981 with David Joudrey and William McKee. The Appellant was responsible for the day-to- day aspects of the operational administration and Mr. Joudrey was directly responsible to maintain payroll records and to look after payroll deductions;

(n) At no time did Granville Ltd. keep tax deducted from employees' wages and salaries separate and apart from its own moneys;

The Appellant's Position

Mr. Snow had a business background. He knew Mr. Joudrey more by reputation than personally. Together with Mr. McKee they entered the restaurant business. Mr. McKee did not remain long and the remaining two decided to share responsibilities in the operation. The appellant was to devote a portion of his time to the restaurant while Mr. Joudrey would take care of the payroll and remittances. Mr. Joudrey, it was maintained, insisted on this arrangement.

As a director Mr. Snow was aware of the obligations respecting remittances of withheld amounts. According to unrefuted evidence this subject arose and Mr. Joudrey gave assurances that all was in order. Mr. Snow who had some previous accounting experience prepared and filed the tax returns for the years 1981 to 1984 inclusive. These showed all the pertinent information and contained excerpts prepared by Mr. Joudrey indicating no problem existed from their interpretation. These were tendered to the Court as exhibits.

The appellant was not aware that there was an immediate problem and when this became evident he did all he could to co-operate with Revenue Canada officials. Mr. Joudrey was ill, then disappeared, and then filed for bankruptcy. The appellant said that his hands were tied. He tried to subpoena Mr. Joudrey to the hearing but could not locate him.

In his defence to the assessment the appellant offered to the Court three reasons why the appeal should be allowed. These were:

1) the validity of the assessment

2) his due diligence as a director

3) the actions of Revenue Canada

As to the first claim the appellant said that the assessment was not accurate. Revenue Canada made several assessments mostly based on estimates. These were not proven while at the same time Mr. Joudrey had the records and the appellant seemed to be blamed for not producing information required by Revenue Canada.

The due diligence defence was put forward on several grounds. First of all the appellant said that on many occasions he was assured by Mr. Joudrey that all was in order. Mr. Joudrey in his memos showed he personally advanced funds to cover these payments thus deceiving the appellant when in fact they probably had not been made.

In support of his position the appellant referred to the case of Bernard Fancy and Dorothy Fancy v. M.N.R., [1988] 2 C.T.C. 2256; 88 D.T.C. 1641. In that case Couture, C.T.C.J. said as to director's liability at page 2261 (D.T.C. 1644):

The personal liability of directors created by subsection 227.1(1) is not an absolute liability. It is conditional upon their personal conduct in respect of the circumstances linked to the omission by their company to remit the deductions from its employees' salary. The exercise of the care, diligence and skill referred to in subsection 227.1(3) exempts them from that personal liability.

Referring further to the case of Lucette Robitaille v. Canada, [1990] 1 C.T.C. 121; 90 D.T.C. 6059 the appellant pointed out that Addy, J. accepted Chief Judge Couture's conclusion in the Fancy case, supra, and said at page 125 (D.T.C. 6062):

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, supra, 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).

and at page 126 (D.T.C. 6063) Addy, J. concluded: “The exercise of freedom of choice on the part of the director is essential in order to establish personal liability.”

Liability should not be attached to a director where there was fraud or deceit by another director. Reference in this regard was made to Stewart Gordon Edmondson v. M.N.R., [1988] 2 C.T.C. 2185; 88 D.T.C. 1542. In that case it was shown that another director acted fraudulently and accordingly the appeal was allowed. The Court in Edmondson made reference to the 23rd edition of Palmer's Company Law which sets out at page 888:

A director is not to be held responsible for the fraud of his co-directors, unless he has expressly or impliedly authorized it.

Mr. Snow also referred to the Nova Scotia Companies Act as follows:

The question of the indemnity of directors is also addressed in the Nova Scotia Companies Act at Regulation 203 (Chapter 81, Nova Scotia Statutes 1989, pages 171/2) which states the following:

No director or other officer of the Company shall, in the absence of any dishonesty on his part, be liable for the acts, receipts, neglects or defaults of any other director or officer, or for joining in any receipt or other act for conformity, or for any loss or expense happening to the Company through the insufficiency or deficiency of title to any property acquired by order of the Directors for or on behalf of the Company, or through the insufficiency or deficiency of any security in or upon which any of the moneys of the company are invested, or for any loss or damage arising from the bankruptcy, insolvency, or tortious act of any person with whom any moneys, securities or effects are deposited, or for any loss occasioned by error in judgment or oversight on his part, or for any other loss, damage or misfortune whatsoever which happens in the execution of the duties of his office or in relation thereto.

Finally the appellant referred to the actions of Revenue Canada. It was alleged that when the company filed returns each year it should not have taken such a long time to discover the problem. The deceit of Mr. Joudrey should have come to light sooner when co-relating employee returns with company returns.

As well the assessments were founded only on estimates and the appellant said he should not be responsible for these when proper amounts could not be proven. In his written trial memorandum Mr. Snow set out:

Despite legislative authority to issue 3rd Party Demands, Revenue Canada surely must have some departmental guidelines which reflect the circumstances. In this case the 3rd Party Demand netted little and set in motion an irreversible chain of events which abruptly ended the Company.

Revenue Canada’s action seriously jeopardized the Company's ability to deal with the assessment on a corporate level and reduced Company assets to a fraction of their value. I wish the Court to take the Revenue Canada action into consideration of the circumstances in this case.

The Minister's Position

In answer to the appellants three reasons why the appeal should be allowed counsel for the Minister replied to the Court dealing with each separately.

As to the validity of the assessment Revenue Canada was in a difficult position. The company had never remitted over a four-year period and so the assessment was based on estimates. Such an approach was used in the case of Fraser Estate v. M.N.R., [1987] 1 C.T.C. 2311; 87 D.T.C. 250. There the Court held that the basic issue in an appeal from an income tax assessment is whether the tax assessed is too high. Nothing was offered by the appellant Mr. Snow, to show such was the case. Revenue Canada has a right to inspect the company's books and records and without these they must make an arbitrary assessment.

The matter of due diligence on behalf of the appellant was discussed and the respondent concluded that the provisions of subsection 227.1(3) had not been met. Reference was made to the unreported decision in Tuesday Chan v. M.N.R. given on November 24, 1989. There the Court said at page 3: "The Act does not distinguish between directors and their involvement whether active, passive, nominee or outside directors. Directors who relinquish their responsibilities to co-directors may still be liable, but due diligence varies in each case."

Here, counsel said, Mr. Snow made a decision to allow his co-director to be in charge of payroll deductions and remittances and did nothing himself in this regard. In Chan, supra, the Court went on at page 5 to set out:"The appellant was probably too trustworthy of his associates, but he cannot abdicate his responsibilities.”

The respondent relied heavily on the Fraser case, supra, to support his argument. There the reference was that one director cannot rely on another director and accept what he is told by the second director. Basically the liability for deductions and remittances is that of the company. This, when not carried out, passes to the directors and there is a higher duty when one or more of the directors was aware that moneys were not being remitted.

In this appeal counsel said that the appellant has not presented a technical defence to subsection 227.1(3) and accordingly is liable for the debt.

As to the actions of Revenue Canada it was simply pointed out that they have a right to collect moneys owing to them and if this disrupts an appellant's actions as a director this is not their responsibility.

Analysis

My comments will be brief. It was established that there was a degree of fraud on the part of Mr. Joudrey, the other director in the company. The appellant was obviously misled by Mr. Joudrey's actions and reports, both verbal and written, as evidenced in the exhibits. The appellant relied for this defence on the Edmondson case, supra, and rightly so.

The present case is quite different from the Chan case, supra, referred to by the respondent. There the appellant had a completely apathetic approach to his role as a director and so his appeal was dismissed. In that case the Court quoted from Kenneth Merson v. M.N.R., [1989] 1 C.T.C. 2074; 89 D.T.C. 22 at 2085 (D.T.C. 29): "For a person to be in a position to prevent an act or omission that person must know or reasonably should have known, having regard to all the circumstances, that the act or omission would occur."

Here we have a contrary situation. The appellant filed the tax returns believing all to be in order. It was the deceit of Mr. Joudrey that caused the trouble and the person who should be liable.

Further in the Fraser case, supra, relied upon by the respondent we find the following passage at page 2315 (D.T.C. 252): “Internal arrangements are a circumstance to be taken into consideration in an appropriate case."

The circumstances here were appropriate for Mr. Snow and Mr. Joudrey to have the arrangement they embarked upon. Upon hearing the evidence and the eventual bankruptcy of Mr. Joudrey it would seem that his insistence to handle the accounting, and the funds was a planned issue and the appellant here was an innocent party.

I do not intend, nor think it necessary, to deal with the validity of the assessment or the actions of Revenue Canada.

I find that the appellant exercised the proper diligence under the circumstances and his appeal is allowed with costs, if any. The matter will be returned to the Minister for reconsideration and reassessment.

Appeal allowed.