Emilio S. Binavince v. Minister of National Revenue, [1991] 2 CTC 2580, 91 DTC 1225

Margeson, T.C.J.:—The appeal is against an assessment, notice of which was dated July 28, 1989 and numbered 0872, by which the appellant was assessed liability under subsection 227.1(1) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) section 68.1 of the Unemployment Insurance Act, section 22.1 of the Canada Pension Plan Act and paragraph 36(a) of the Income Tax Act of Ontario for unpaid deductions, interest and penalties payable by Prestige Mailing System Limited (a body corporate, hereinafter referred to as (Prestige)) in respect of a notice of assessment dated December 9, 1987. I am only able to deal with the claim under the Canadian Income Tax Act. The uestions for determination are whether or not the appellant was a director of Prestige at all relevant times and if he was, did he fail to exercise the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances as contemplated by subsection 227.1(3) of the Income Tax Act. A motion to amend the pleadings was made by the respondent before commencement of the case and it was unopposed and allowed. The period in question in this appeal is from January to September of 1987.

Facts

There was agreement between the parties that there was a failure to remit during the relevant period of time. It was further agreed by the appellant, that he was a director for part of the relevant period of time up to August 5, 1987.

Evidence was given by Mrs. Emilio Binavince, the wife of the appellant, who described how the appellant got involved with Prestige in 1985. Basically she said that the appellant was attempting to assist a business that was in financial difficulty, which had been operated by a fellow Filipino. The assistance included the injection of funds into the Company and included a payment to Revenue Canada in the sum of $35,792. The witness indicated that her position was to go to the plant and keep an eye on what was going on on behalf of her husband. At that time, the appellant was the president. Mrs. Binavince did not get paid for her efforts and after the arrival of Mr. Pedro Ignacio into the Company, she was no longer involved.

In the fall of 1986, her main task was to go over the accounts receivable and accounts payable. She left in October or early November that year, when Mr. Ignacio felt confident that he could handle matters himself. Mrs. Binavince indicated that while she was there, the appellant went in every morning at 7:30 or 8 o'clock for meetings with Messrs. Obas and Ignacio. He also returned most evenings to check things out and to have conferences. She said the appellant told him time and time again to pay Revenue Canada first and in the summer of 1986, sent her to Revenue Canada to pay $23,576.40 out of their own funds.

Mrs. Binavince took steps to bring in another bookkeeper that both her husband and herself had known earlier. Together they made a list of accounts receivable and accounts payable and tried to call in the accounts receivable. She said the appellant made use of the list to work out a repayment schedule for the Company. Ms. Evelinda Gal I aza wrote the cheques and gave them to Mr. Obas for signature. The appellant did not always see them. The appellant signed them sometimes. They were mailed out. After October 14, 1986, the appellant did not sign the cheques. Mrs. Binavince said that she knew of the arrears to Revenue Canada in 1986, of discussions for payment and did not know if the amounts owing to Revenue Canada appeared in the accounts payable each month. She aid not know if the appellant helped make the choices as to who was to be paid or not. She said she did not agree with Mr. A. Cuenco being brought in and he was not prepared to bring in a new system of accounting. There was never any suggestion as to a separate account for Revenue Canada. She said Mr. Obas was the man who ran the business as far as she was concerned. On re-direct examination she said that the accounts receivable were never enough to meet the accounts payable, moneys were owing to Revenue Canada and the appellant took his own money to pay them. She confirmed that Woods Gordon and MacKechnie, accountants, were retained to do a reconciliation of cheques and to go over the Company's books.

The main witness for the appellant was himself. He reiterated how he became involved in Prestige and how the financial difficulties of the Company came about as a result of severe losses suffered in 1984 following a failure of the project involving the sale of papa coins. The appellant was asked to get involved as a member of the ethnic community and to turn the Company around. He invested money personally and through his Company and between 1985 and 1987 had put in over $200,000. He was able to settle many accounts and at one point Revenue Canada was paid up. However, he felt that Revenue Canada had not treated him fairly as they felt he was giving preference to other creditors and hiding funds. His evidence was that all of the outstanding accounts could not be paid and he said priorities dictated who would be paid.

The appellant said he brought in MacKechnie and Company to advise as well as obtaining suggestions from Woods Gordon accountants. He said they instituted an accounts receivable and payable list, brought in his wife to assist him and tried to improve management. In 1986, there was a reorganization and Mr. P. Ignacio, Mr. A. Cuenco and a Mr. G. Hynna were brought in as directors and officers of the Company and as shareholders. Mr. Ignacio became president, Messrs. Obas and Cuenco vice-presidents and the appellant became Chairman of the Board. The appellant continued to come in every day before going to his office and every night before going home. He indicated to the Court that he was very involved in tax law, tried to show the management team how to follow the rules, sought information from the staff and tried to implement his changes. He told them that Revenue Canada was a priority. He signed many remittances to Revenue Canada but by October 1986, he no longer signed the cheques.

The appellant felt that Mr. Ignacio was a very reputable businessman that could be trusted to implement his changes as well as Mr. Obas. He said whenever they told him they needed more money to pay this account or that account he gave it to them. In the fall of 1986, he felt the system that he had instituted was adequate. He said there was no reason to believe that the Company would fail. He said as late as March 31, 1987, the accounts receivable were $230,430.89—$180,000 of which was current to 60 days. He said he resigned as a director on July 31, 1987 and things were good at that time (Exhibit A-3 is dated August 5, 1987 which is his written resignation to the Board).

The witness related the chain of events which ultimately led to the receivership of the Company including what turned out to be a very costly move to new quarters as a sub-tenant, but because the principal tenant did not get the consent of the lessor, legal action was ultimately taken against Prestige which resulted in them being ordered to vacate the premises and pay substantial damages. The Company could not meet this crisis and it was placed into receivership by another of the appellant's companies who was a secured creditor. The appellant said that as late as March 1987 there was still a possibility of turning the Company around but by June 1987 he was considering receivership. He said there was no indication of unpaid remittances to Revenue Canada. The Board of Directors on September 4, 1987 voted in favour of the receivership and it was ratified by the shareholders on September 17, 1987. The appellant was not present at the director's meeting according to the minutes.

The appellant said that the Company was not put into receivership because of debts owing to Revenue Canada but because of the judgment against it by R.P.T. Holdings Incorporated.

Upon cross-examination the appellant admitted to being a very experienced lawyer and teacher of law, being well-versed in income tax matters, familiar with trust accounts and the need to be careful in that regard. He said that while he was a director of Prestige there was no trust account for Revenue Canada, he did not know that he had to have one, he had direct managerial responsibility up to September 1986 and acted as president until then. He looked upon his role as a police man, similar to a lender looking after his investment. He said he wanted to see the tax was paid on time and made arrangements with the tax department. He admitted there were many meetings held, Revenue Canada payments were discussed but there were no formal directors' meetings called for that purpose. He signed cheques that were brought to him but did not know for sure who prepared them. He was resident for a while and vice-presidents Messrs. Obas and Moran reported to him. When he became Chairman of the Board in 1986 he gave up the day-to- day control of the Company but continued his policing functions as his stake in the Company went up. He had no contact with the creditors but had access to the list of accounts payable and accounts receivable which were also given to the bank. He said that as chairman he saw the lists each month but could not say if the accounts payable list included Revenue Canada even though as president he negotiated a large payment to Revenue Canada.

The witness rejected the suggestion that as president and then as Chairman of the Board he knew about the moneys payable to Revenue Canada and knew it was not on the list of accounts payable because the bookkeeper could not determine the amount. He admitted that when he was president he had to make decisions as to who got paid but did not know if he participated in such decisions after he was chairman. However, he did admit that as chairman, Messrs. Obas and Ignacio came to him and asked for money and Revenue Canada was one of the reasons it was needed. He said the Company was doing okay from September 1986 to February 1987 and he did not have to inquire and he did not know if he inquired if the debt to Revenue Canada was up-to-date after that and did not ask the other directors. He did not inquire of Ms. Gallaza.

On the issue of his resignation as chairman and director he said he resigned on August 5, 1987. He said it was delivered to the Company. Further, he said he gave notice before the September 14 meeting that he resigned and this was given to Messrs. Obas, Ignacio and Cuenco orally.

The appellant said that in February 1987 the Company had problems and he was considering receivership and wanted to find out what liabilities were there. He said he was given a list of accounts payable and receivable—Exhibit A-1 (Tab K)—and Revenue Canada was not there. He had various consultations with Revenue Canada about the debt although there was no agreement as to what he had actually said. It is obvious that ne made arrangements to pay, which were not kept and new arrangements were made. As late as July 1986, he signed cheques to Revenue Canada.

He also said by June 6, 1986, he was beginning to think he could not help the Company further and tried to sell it. Further, he considered receivership. He said he was persuaded by Messrs. Hynna and Obas to reorganize. There was a change of directors and on June 2, 1986, Mr. Hynna, another lawyer became a director and secretary-treasurer. He identified Exhibit R-13, a banking and borrowing resolution dated August 27, 1986 that listed him as Chairman of the Board ana director having signing authority. Messrs. Ignacio and Cuenco were added as directors on September 24, 1986.

The appellant identified Exhibit R-19, the minutes of the Board of Directors meeting dated June 8, 1987 which talked about accounts payable, accounts receivable, losses, cash flow problems and it was suggested by the respondent that these minutes refute his statement that there were no problems with the Company except his own loans. He did not agree.

The appellant denied that he was ever president of Prestige System Enterprises Company Limited under which Prestige occupied their premises as sub- tenant. However, Exhibit R-24 was signed by him as president of Prestige System Enterprises Company Ltd. Yet, the appellant said he did not know what capacity he was acting under when the letter was written and indeed was reluctant to identify what appeared to be his own signature.

The respondent referred the appellant to Exhibit R-25 which was an agreement between Urduja Enterprises Corporation and Neilson Tractor Ltd. to sell certain assets of Prestige. It referred to wages and source deductions which were outstanding and although the agreement was signed on behalf of Urduja by the appellant, he maintained that he did not know that they were outstanding before the receivership. He confirmed service on him as a director of Prestige on January 10, 1988 by the bailiff but denied he admitted to the bailiff that he was a director. He admitted putting Prestige into receivership on behalf of his creditor Company Urduja as a result of that Company holding the former bank security and that monies were paid to Urduja by the Receiver but denied that he got any money himself although he was owed considerable.

Ms. Yvonne Higgins of Revenue Canada gave evidence as to her dealings with the appellant starting July 17, 1985 over deductions owing by Prestige up to that time. She told him that previous agreements were not being kept, that Current remittances requirements were not being met and had various meetings and discussions with him until she was transferred to another unit. In cross-examination, she stated that the appellant was aware of payroll deductions being owing and that there was financial trouble in the Company. She identified Exhibit R-6, a letter signed by the appellant on Cowling & Henderson letterhead, Barristers and Solicitors, but she felt that she was dealing with the appellant as a person in authority in the Company and not as its lawyer. This letter was dated August 6, 1985.

Mr. Donald Godding was a collections officer with Revenue Canada and first dealt with the file on November 13, 1985 when he found that Prestige was in arrears for payroll deductions. He said the appellant told him that he was a 50 per cent shareholder in the Company and was responsible. At first he told him he wanted a week to look at the books. Subsequently, various arrangements were considered and payments made but some arrangements were not kept. On April 3, 1986, he said the appellant told him that all the accounts payable could not be met in full. He was advised that legal action would be started and after telling Mr. Godding on April 7, 1986 that Revenue Canada was too pushy, he then indicated that he had no interest in the Company and was owed money himself. He said he had no list of accounts payable and no current financial statements and he had no control over which accounts were paid. On April 9, 1986, garnishee was levied against Prestige.

On July 22, 1986, the appellant told Mr. Godding that he was no longer involved with the business. Mr. Godding was transferred to another area.

In cross-examination he indicated that in July 1986, the account was up-to- date. When pressed he said he was dealing with the appellant as a major shareholder not as a Company lawyer.

Mr. Gabor A. Rajhathy was a bailiff for the judicial district of Ottawa Carleton. He served the appellant on Monday, January 18, 1988 with a statement of claim. He said he knew him as a director of Prestige but he did not remember if he told him he was serving him as a director and did not remember if the appellant admitted being a director at that time.

Mr. George Hynna was a barrister who knew the appellant when they were partners in the same law firm and he got interested in Prestige through the appellant. He invested $25,000 in the Company in January 1986 for an equity snare and he became a director and secretary-treasurer of the Company. Between January and June 1986, they had informal meetings among them- selves, Messrs. Binavince, Ignacio, Obas, Cuenco and Lumsden. Between January and June 1986, he said the financial position of the Company was not too rosy. There were cash-flow difficulties. He said overall control was in the appellant, he took the leading part in any discussions about the operations, the merger, and the search for a manager. During the summer of 1986, the debt to Revenue Canada became an issue he said, it had to be paid, it was settled and by the fall, things looked better but then it all changed.

Mr. Hynna said he attended director’s meetings in the summer and fall of 1986 and the cash-flow problem was a major concern. In the fall of 1986, he confirmed that the appellant was the Chairman of the Board, Mr. Ignacio was president, he was secretary-treasurer, Mr. Cuenco and Mr. Obas were on the Board. He opposed any merger and any share change in the organization. He resigned on June 30, 1987 in writing and delivered it to the appellant. He also indicated to the other directors that he was going to resign. He said, at that time, that the appellant's position remained the same. Mr. Hynna did not believe he was getting all the information that he should have about the accounts, the customers, liabilities and monthly reports. After February 1987, the cash-flow deteriorated. He was not present when the Revenue Canada account was discussed and found out about it in October 1987 from the Receiver. He was not aware of the alleged resignation of the appellant dated August 5, 1987.

In cross-examination by the appellant, he reiterated that he did not see any change in the appellant's functions in the Company after the appellant became Chairman. He felt he was calling the shots and had the greatest interest in the Company. As far as he was concerned, Mr. Ignacio took instructions from the appellant. He agreed that the appellant was a director after the reorganization as a result of being a nominee of the bi-mutual trust and that the other directors and shareholders were acting for themselves. He further added that the appellant took a very close interest in what was going on and continued to give directions even between meetings. He said he saw some monthly statements and others he did not. He felt they were for the purposes of the directors. He pressed for a new accounting system but what he got was the statements.

At one time, Mr. Hynna asked the appellant about the accounts and the appellant told him he was a director and should go and look at the Company accounts himself. As far as he was concerned, Revenue Canada was paid off in the fall of 1986 and from that point on the financial statements did not show any amount owing and he felt that they were being paid on time. From January 1987 to June 1987, he got no information about payments.

Mr. Paul Lumsden was referred to as a manager for a short period of time and said the appellant would deal with everyone in the company. He was the person to whom Mr. Lumsden reported. He said a lot of the appellant's time was taken up discussing financial matters. Mr. Lumsden would follow up leads for sales mentioned to him by the appellant. He generally reported to Mr. Binavince about what others were doing in his absence.

Evelinda Gallaza worked at Prestige from October or November 1985 to August or September 1987. She knew of the problems they were having. She said she never wrote down an account payable to Revenue Canada and was not aware of what amounts were owing. She made up the cheques and gave them to the appellant and Mr. Obas to sign them. She said the appellant never asked if any amounts were owing to Revenue Canada and she does not recall him inquiring of anyone else. She prepared the list of accounts payable and accounts receivable on the form the appellant instituted. The accounts payable and receivable went to Mr. Obas and the appellant got copies. She said she knew about arrears to Revenue Canada before 1986 and assumed they were paid. She was aware that the appellant was interested in accounts receivable and accounts payable.

In re-direct, she said that when she was working with Mrs. Binavince, she was aware of arrears to Revenue Canada but did not put them on her list because Mrs. Binavince was looking after that.

Mr. Nick Obas got involved in the Company in 1980-81 and later got the appellant interested. He became vice-president Operations when the appellant was president. He was involved in production, sales, training, repairs and operations. He described the appellant as being in an administrative role. Financial affairs were discussed by all three every morning. He said Revenue Canada deductions were always a problem. Even after the reorganization, he said the appellant called the shots as to what the Company should be doing. They discussed the payroll as the number one problem and also accounts receivable and payable were discussed. He said Revenue Canada arrears were discussed in June, July and August 1987 at their meetings. He said after the reorganization, the shareholders and directors decided who was to be paid.

He testified that he never saw the resignation that the appellant allegedly signed on August 5, 1987 and that he did not know about it. He agreed that when the appellant came in he terminated many perks that the Company had been giving to his officers. In cross-examination he said that the appellant was calling the shots for the Company. He agreed that the appellant introduced bank reconciliations and the institution of a list of accounts receivable and accounts payable. He said he discussed the Revenue Canada payable with the appellant.

He said after the reorganization, most cheques were signed by himself and Mr. Ignacio, including the cheques to Revenue Canada. Source deductions were done regularly and given to Ms. Gallaza to mail out. He reiterated he did not know that the appellant had resigned as a director and said he was present at a meeting of directors on September 14, 1987. However, when shown the minutes of that meeting and the absence of the appellants name on it, he could not explain it as he said he was there. He was questioned by the appellant about signing documents when he did not know what they were and he said he signed anything the appellant put in front of him since he was a lawyer and he trusted him. He confirmed $15,000 paid to the appellant from Prestige was to pay back rental payments to his Company on machinery that Prestige rented. He confirmed the appellants loans were not repaid.

Mr. Pedro Ignacio became involved with the company in 1984-1985. He became president and a director after the reorganization. The Company was in a big mess and cash-flow was restricted according to his evidence. He said in August 1986, that the appellant told him to take care of sales and he would look after the finances. By the fall of 1987, it was the same. His evidence was that there was a formal meeting of the Board of Directors every month and informal meetings every morning. They would discuss business, cash-flow and this continued until the receivership commenced.

Mr. Ignacio said that as late as June 1987 at a board meeting, the arrears to Revenue Canada were discussed up to June 1 for source deductions. From June on, there was no payment made to Revenue Canada and the Board of Directors knew that. By October, he said $23,000 was owed in back wages net of deductions. That was discussed at a board meeting. He said the appellant knew about it because at the board meeting he gave the report. Further he said, I knew he was a director and he knew source deductions had to be paid and it was in the agreement (Exhibit R-25). Further, he said, Mr. Hynna resigned as a director in August and it was recorded by the secretary.

Mr. Ignacio said that he never saw any resignation of the appellant and was not aware that he had resigned as a director or chairman. On cross examination, he admitted the appellant required his own signature on the cheques and suggested maybe it was because he did not trust the other directors. He said payments were being made to Revenue Canada after May but the audit showed them to be short. He was surprised at this. He said no money was remitted to Revenue Canada in June, July or August and all the directors knew about it and were present. He said Evelinda normally did the calculations for the payments to Revenue Canada but she could not do them any longer as no wages were paid. He reiterated that all directors were present at the June 1987 meeting. There were two or three meetings in June and one was formal and votes were taken. He said the account to Revenue Canada was not discussed in the June 8, 1987 meeting because it was not due until June 15, 1987. He said at the board meeting of September 14,1987 he reported to the Board that Revenue Canada was not paid and he does not know why it was not in the minutes.

Regarding the payments to Revenue Canada, he said Evelinda did the calculations, made the cheques and gave them to Mr. Obas, then Mr. Ignacio reviewed them and if there was money he signed them and if there was not, he did not sign them. If signed, they were mailed to Revenue Canada or put in the bank. If they were not signed, he kept the cheques on his desk. Evelinda was told what cheques were not signed. His evidence was that the statement of accounts payable and receivable reflected what Evelinda knew (subject to the fact that no deductions were made where wages were not paid). He said if there was not enough money to pay wages and deductions, neither were paid. Ms. Hansen was hired by Prestige when Evelinda went on maternity leave. If Evelinda did not do it, then Ms. Hansen did it. She was supposed to follow the same procedure as Evelinda.

In rebuttal, Mr. Michael Carson, the receiver gave evidence. He said at the meeting of August 5, 1987, he and the appellant discussed the awkwardness of the appellant's dual role as director and creditor and it would be best for him if he resigned. However, this was only discussed between the two of them.

In rebuttal, the appellant said he was not the big boss, he asked hard questions about decisions that were good for the Company, restricted benefits to the officers and directors and tried to ensure that the Company was spending the money wisely. Ms Gallaza was instructed as to the proper procedure in dealing with accounts payable including Revenue Canada. He said that Exhibit R-25 was an uncompleted agreement which included the indemnity to the buyer with respect to the payments to Revenue Canada.

Appellant's Position

The appellant argues that subsection 227.1(1) creates a reverse onus on him. He says it is not constitutional. The action makes one party liable for the acts of another. It creates vicarious responsibility.

Further, he argues that subsection 227.1(1) is part of a scheme of collection of taxes established under section 153 of the Income Tax Act. In order for section 227.1 and subsection 153(3) to apply there must be receipt and payment of wages. If the employee does not receive wages from the employer then there is no tax liability. There is no failure to deduct, withhold or remit. There is simply a failure to pay wages.

The appellant says that before the director is put on the defence under subsection 227.1(3) the Minister must prove (a) that the wages were paid to and received by the employee; (b) the corporation failed to (i) deduct (ii) withhold or (iii) remit what was deducted and withheld. In the case at bar, he said the issue is miscalculation and therefore the Minister must prove that his calculations were correct and that the wages paid to the employees were more than he was entitled to receive free from the legal deductions.

Further, the appellant argues that Exhibits R-1 and R-2, the required and submitted remittances and the remittance analysis show nothing more than an under-remittance or no remittance but do not show that the employees had been paid. The Minister must show that subsection 153(3) applies and thus subsection 227.1(1) is also applicable. To accept otherwise he says, is to create a presumption against the director who is obliged to rebut it, thus, a "reverse onus" which would be contrary to section 7 of the Canadian Charter of Rights and Freedoms. The Minister has the onus to prove by evidence not merely non-receipt by Revenue Canada of the amount claimed as owing.

Insofar as the question of due diligence is concerned, he said there was a mistake or miscalculation, not a failure, until such a time as there was an audit. There was no need to pay until the amount was known. If he had known, he would have paid the amount owing since he had already paid in over $245,000 to the Company. He argues that the failure occurred after the receivership was commenced.

The appellant's position is that it was Mr. Ignacio who made the decision as to who was paid. From June to September 1987, there were no remittances and it was Mr. Ignacio who decided this. The appellant said that he took positive actions, he brought in Mr. Ignacio, a businessman, he kept control over signing cheques, put trust in Mr. Obas and Mr. Cuenco as well, he felt they were doing their job and there was nothing wrong with that.

On the question of his resignation, he says that he resigned on August 5, not because of the liability but because of the conflict of interest. He says he discussed it with his accountant and the advice was that it would be conflict of interest for him to continue as a director and also as a creditor of the Company seeking to have part of his claim satisfied. He stated the agreement Exhibit R-25 shows his intention to have any tax paid. However, the receiver only paid Revenue Canada $4,900, the appellant agreed to pay his share and this case should not have been brought before the Court and Revenue Canada was unfair in proceeding the way they did.

The appellant further says that he visited the premises frequently to see that things were going right, had people checking the Company's actions, and no reasonable person could have done more. He said he had no reason to believe that Mr. Ignacio was signing cheques and not sending them out. He was not required to have a trust account, he injected $40,000 in February 1987, so why would he not pay another $25,000 if he knew it was owing. He said he even paid the wages.

The appellant admitted that he was a tax lawyer and that a higher duty was owed by him as director than some but he said he fulfilled that duty. He argues that the Minister should tell the taxpayer how much is owed and give him a chance to pay before proceeding with legal action. His position is that his efforts were thwarted by Mr. Ignacio as in Stewart Gordon Edmondson v. M.N.R., [1988] 1 C.T.C. 2185; 88 D.T.C. 1542.

What he did he says was not negligence. He cites many cases in support of this proposition. He argues the test here is the reasonable man test, not a degree of care so high that not even a reasonable man could meet it. It does not require the impossible. He cites Dovey v. Cory, [1901] A.C. 477 in support of his position that to rely on a person he trusted and has no reason to suspect is not a source of negligence. He requests that the appeal be allowed and the assessment set aside.

Respondent's Position

The respondent argues that the Minister does not have an onus of proof as described by the appellant. The appellant has the only onus of proof and that is to disprove the assumptions of the Minister on a balance of probability.

He argues further that a director's liability as imposed by subsection 227.1(1) does not offend the Charter and especially section 7 which applies to the rights of life, liberty and security of the person as opposed to property. Economic rights as generally encompassed by the term "property" are not within the ambit of section 7. He cites Attorney-General of Quebec v. Irwin Toy Ltd., [1989] 1 S.C.R. 927; 58 D.L.R. (4th) 577 (S.C.C.) and Reference re. ss. 193 and 195 of the Criminal Code of Canada (1990), 56 C.C.C. (3d) 65 at 97 (S.C.C.) in support thereof.

The respondent suggests that Regina v. Oakes (1986), 26 D.L.R. (4th) 200 is not applicable to a case such as this which is civil in nature as opposed to criminal and that section 11 of the Charter does not apply to income tax cases. He refers to Trumbley and Pugh v. Metropolitan Police Force, 45 D.L.R. (4th) 318 (S.C.C.) and Matheson & MacMillan Ltd. v. P.E.I. (1986), 59 Nfld. & P.E.I.R. 189 at page 194 (P.E.I.S.C.) as authority.

On the main issue of due diligence or reasonable care under subsection 227.1(3), the Minister says that the Company should have kept a separate account as in James V. Barnett v. M.N.R., [1985] 1 C.T.C. 2336; 85 D.T.C. 619. He had a duty to inquire about the status of Revenue Canada's account he says and he did not.

Further, the Minister argues that the appellant was the one who had control, whether it was voting control or not, it was de facto control. All the evidence points to that as far as the respondent is concerned because of his financial involvement with the Company. Mrs. Gallaza's evidence does not show that the appellant made inquiries. Payment to Revenue Canada in July 1986 of $26,000 was only made due to actions of Revenue Canada. He says it was unreasonable to rely on Mrs. Binavince as a listening post because she left the Company when Mr. Ignacio arrived and therefore could serve no function which was useful to the appellant during the relevant time and even when she was there, she could not tell him very much as she did not even know who was making the decisions.

Insofar as the accounts receivable list is concerned, the Minister argues that it was a very unreliable guide especially as regards Revenue Canada's account. Revenue Canada does not even show up on the list of accounts payable in July 31, 1987 even though it was due on July 15, 1987. The history of the accounts payable list was consistent since the appellant became involved in the Company and there was no reason for a prudent person to rely on it as being accurate. He should have been very wary of it.

The respondent suggests that the appellant, as an experienced tax lawyer who had extended negotiations earlier with Revenue Canada over the account, who knew what the problems were, owes a very high standard of care as a director. He had influence, power, skill, the Company was in a mess, he ought to have moved quickly under the circumstances and he did not. He knew about the serious cash-flow problem in February 1986 and again in early 1987.

The evidence according to the respondent shows that the appellant was not disconnected from the financial and administrative functions of the Company as he suggested after he became Chairman of the Board. He had a duty to prevent the failure, not remedy it. It is no answer to say if Revenue Canada had told me the amount I would have paid it. He says there was no tried and tested system in place to insure remittances to Revenue Canada. Given the history of the account, he should have instituted one, not just a general accounting system. His knowledge of previous defaults called for greater caution. He did not even ask if the account to Revenue Canada was being paid because he did not want to insult them as he felt they were doing their job and they knew what they had to do. Reliance and delegation of responsibility to Mr. Ignacio, the respondent argues is not enough. If all reasonable steps have been taken to set up a system which was shown to work and reliance was put on specialized persons, then a failure of the system might not be conclusive in itself. However, the appellant knew that salary was not being paid and remittances were not being made or he should have known. He says the evidence of Mr. Obas and Mr. Ignacio support the proposition that the appellant continued looking at the list of accounts payable and received them even after he became Chairman. He had brought the Revenue Canada account up-to-date as president and he should have done so as Chairman. He says it is no defence to say that the matter of the Revenue Canada account did not come up in formal directors meetings because the evidence in Court was that it was brought up at different informal meetings.

The appellant, as Chairman, was continuing to receive information daily he says, what the money was required for, the month-to-month position of the Company, yet he made no inquiries as to the Revenue Canada account after it was brought up-to-date in July 1986. His evidence that he did not know of the problem is at odds with the evidence of other witnesses before the Court.

The Minister argues that when Mr. Hynna was looking for more information about the Company, that should have been a red flag to the appellant, yet nothing was done about it. Further he argues that even if I disbelieve the evidence of Mr. Obas and Mr. Ignacio, there is still sufficient evidence of failure by the appellant to act reasonably as a director under subsection 227.1(3) of the Income Tax Act.

The respondent cites a number of cases in support of his position and says that the appellant has not met the tests required of a director as set out and discussed therein.

On the question of the resignation of the appellant as the director of the Company, the respondent merely says that the appellant would have had good reason to believe that he had resigned in September and not in August although the appellant gave evidence in that regard himself.

In rebuttal, the appellant says that he hired Mr. Ignacio to do the job so why should he continue to do it. "I am damned if I do too much and damned if I do too little", he said. He said he brought in a system of control by MacKechnie and Company and other people that he brought into the Company. He did the best under the circumstances that a reasonable director could do. You don't inquire of Revenue Canada every day, he said, as to whether or not the remittances are being made, he did not do the calculations and he did not know how to do them.

Analysis and Decision

I shall deal firstly with the constitutional arguments raised by the appeal. The appellant has argued that subsection 227.1(1) creates a reverse onus on the taxpayer and is therefore unconstitutional. To deal with these issues, I believe requires a consideration of sections 7, 11 and 15 of the Charter.

Sections 7,11 and 15 of the Charter provide as follows:

7. Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.

11. Any person charged with an offence has the right

(d) to be presumed innocent until proven guilty according to law in a fair and public hearing by an independent and impartial tribunal;

15. (1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

(2) Subsection (1) does not preclude any law, program or activity that has as its object the amelioration of conditions of disadvantaged individuals or groups including those that are disadvantaged because of race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

One must consider what really is the effect of subsection 227.1(1) of the Income Tax Act. Surely that effect is to do nothing more than to make the directors liable for the failure of the Company, a legal person which could only act through its directors, for not doing what the law requires them to do, that is to deduct and remit source deductions. Surely that amounts to nothing more than making them responsible for improperly managing the Company which liability they can escape by showing due diligence.

In light of the ruling cases in income tax matters of Johnston v. M.N.R., [1948] C.T.C. 195; 3 D.T.C. 1182 (S.C.C.) and M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 18 D.T.C. 5184 (Ex. Ct.) that the taxpayer has the onus of proving the assessment is wrong, surely the imposition of the liability on the directors for the failure as referred to in subsection 227.1(1) is nothing more than an additional duty imposed by statute and no more burdensome than the general onus referred to in Johnston, supra.

Section 15 of the Charter was discussed in Andrews v. Law Society of British Columbia (1989), 2 W.W.R. 289 (S.C.C.) and in order for that to offer any relief to the appellant I would have to find that the duty imposed on the directors under subsection 227.1(1) amounts to discrimination and to do that the grounds for discrimination would have to be one of those enumerated in section 15 or one analogous thereto. The duty imposed on directors under subsection 227.1(1) may be additional to those on non-directors but the decision to be a director was the director’s own decision and such a position was not imposed upon him by any other person or by any statutory provision. He is free to reject the position and so I fail to see how any duty imposed by this section is discriminatory since it applies to all directors or why it deprives the director of any rights guaranteed under section 7 of the Charter.

As pointed out in Andrews, supra, "It is not every distinction or differentiation in treatment at law which will transgress the equality guarantees of s. 15 of the Charter." Further, in the same case, Wilson, J. at page 325 said, “If every distinction between individuals and groups gave rise to a violation of s. 15, then this standard might well be too stringent for application in all cases and might deny the community at large the benefits associated with sound and desirable social and economic legislation.”

I agree with the respondent's submission that the Oakes case, supra, is not applicable to the case at bar. That was a criminal case which decided that everyone had a right to be presumed innocent until proven guilty and dealt with paragraph 11(d) of the Charter, not section 7 or section 15, that decision clearly placed the burden of proof on the Minister beyond a reasonable doubt.

I further find that if I am wrong in the above conclusions, then I find that I am satisfied that any burden cast upon the directors here under subsection 227.1(1) of the Income Tax Act can be demonstrably justifiable in a free and democratic society in accordance with section 1 of the Charter.

The appellant submits that before there can be any liability upon him under subsection 227.1(1), the wages must be paid to the employees. With that I agree. However, I do not agree that the burden here is on the Minister to prove that the wages were paid to the employees, neither do I accept the argument that there was only a miscalculation and therefore the Minister must prove the calculations were correct. As already referred to in Johnston, supra, the onus of proof is on the taxpayer to dislodge the Minister's presumptions and it might be possible in any given case to be successful in that regard with the proper evidence.

In this case not only has the appellant failed to displace those presumptions but I am satisfied from his own evidence that the wages were in fact paid in the end to the employees, and if there were an error in the calculations as to the proper deductions, then the appellant had the burden of establishing that error and in that regard he has failed.

The remaining issues are two-fold. Has the appellant satisfied me that he has acted with due diligence as a director, and if he has not, has the appellant satisfied me on the balance of probabilities that he was not a director during the whole or any part of the period in question here?

I cannot help but be overwhelmed by the abundance of evidence before me of the high profile which the appellant enjoyed in this Company. Whether he was the big boss, as some have said, or the moving force, or the person in charge, or the one who called the shots, as various witnesses indicated, there can be no doubt that from the beginning until almost the end, the appellant held a very prominent position in the Company in both a managerial and administrative capacity. He was privy to all financial information respecting the Company, he met regularly with all management, he knew throughout of the financial problems of the Company, he loaned money to the Company and was instrumental in having others inject money into the Company, he was in fact a director, president and Chairman of the Board of the Company for different time periods, he was aware of the failure of the Company throughout to meet the remittance requirements to Revenue Canada and indeed was instrumental in arranging postponement of payments and it was through his efforts to a large degree that the account was brought up to date by the summer and fall of 1986.

I am satisfied from the evidence that there was very little change in the appellant's position in the Company from the time he was president to or during the time he was chairman. Obviously everybody in the Company believed him to enjoy the same relative position and it was obvious to them that the change from president to Chairman of the Board was one that carried a change in name only and did not take away any power, influence, knowledge or control that the appellant enjoyed in the Company. When the appellant attempts to deflect any of these attributes from himself to others, he fails before me.

Basically, the appellant says that he took all the actions that a reasonable and prudent person would have taken under the circumstances to ensure payments to Revenue Canada, yet the evidence is clear that after the account was brought up to date in the fall of 1986, that almost immediately it started to deteriorate again so that by the early spring and summer, it was in arrears again, cheques were being made for the remittances and not signed because there was no money in the account to pay them; decisions were being made as to who should be paid, discussions were being had with Revenue Canada about the state of the account and if the appellant did not make the decision about what was to be paid, he certainly knew of the discussions, had regular meetings as before with the other officers, directors and shareholders and he should nave known that the remittances to Revenue Canada were in arrears.

It is clear that once the account was brought up to date in the fall of 1986, anything that the appellant did to guard against or prevent the failure com- plained of here was woefully inadequate. Surely it is no consolation for the appellant to say he visited the premises frequently, he had people there who were looking out for his interests, he hired others to take responsible positions, he retained accounting personnel to set up a proper system of accounts payable and receivable, when indeed the very account to Revenue Canada that was in arrears did not even show up on the accounts payable list. It is obvious that whatever system he had instituted to guard against the failure was not adequate and any reasonable person in the position of the appellant should have known about the failure.

I would be hard pressed to find that any director in the appellant's position acted reasonably but when you apply the test of due care or reasonableness to the appellant possessed as he was of his business background, his knowledge of the history of the Company, his actual experience with Revenue Canada on the account, his legal background and his confessed knowledge of taxation matters, we must ascribe a very high standard to him, and he has not met that standard.

The appellant suggests that to find him liable would be to ascribe to a director a standard of care that could not be met, that would be impossible. I disagree with that submission and although it is not for me to suggest what steps he could have taken to prevent the loss, the most obvious would have been to set up a separate account for the remittances, to check periodically to see what the state of the payments were, to inquire of the bookkeeper as to why the name of Revenue Canada did not appear on the list of accounts payable, to bring the matter uP with the directors from time to time as they indicated it was, and given the poor history of the Company for paying Revenue Canada, not to rely on the actions of others to do the job even if he trusted them, and even if he did not know what was going on. Even if there were a delegation of authority here, it does not help the appellant. Even if there was a system in place as he suggests, it did not do what it should have done and it should not have been relied upon. I find that the appellant did not act as a director in accordance with subsection 227.1(1) and that defence under subsection 227.1(3) of the Income Tax Act is not available to him.

I must now turn to the question of the appellant's resignation. The written resignation of the appellant is dated August 5, 1987, Exhibit A-3. His evidence was that he actually resigned on July 31, 1987. The written resignation forms a part of the evidence and of the records of the Company. Its existence and origin has not been seriously challenged. The appellant's own sworn testimony before me was that he gave notice before the September 14 meeting that he had resigned and this notice was given to Messrs. Obas, Ignacio and Cuenco, Orally. Against that evidence is that of Mr. Ignacio who said he never saw the written resignation and was not aware of the fact that he resigned. Strangely enough he said that when Mr. Hynna resigned he was aware of it and it was recorded by the secretary and yet the documents before me show that the appellant's resignation was entered in the documents of the Company.

Mr. Obas said that he never saw the resignation of the appellant and he did not know about it. He further said that the appellant was present at a Board of Directors meeting on September 14, 1987 but when shown the absence of the appellant's name on the minutes of directors for that date, he could not explain it, even though it bore Mr. Cuenco's signature as secretary. It is possible that he was confusing the meeting of shareholders that was held on September 17 and which the appellant attended in a representative capacity.

Michael Carson, the receiver, testified that both the appellant and himself discussed the awkwardness of the appellant as a director on August 5, 1987 and it would be best for him to resign. It was discussed only between the two of them he said.

The bailiff, Mr. Rajhathy served the appellant as a director on January 18, 1988, but could not say that the appellant admitted that he was a director at that time.

After considering all the evidence, considering the credibility of the witnesses as I am entitled to do, having drawn all reasonable inferences from the evidence that I am able to do, and having made due allowance for the fallibility of memory, having due regard to the exhibit written resignation and the viva voce evidence of the appellant himself on the stand, and after rigorous cross- examination, having considered the argument of counsel of the respondent on the question of the correct date of resignation, I am satisfied on the balance of probabilities that the appellant resigned as a director on August 5, 1987 in accordance with section 108(2) of the Canada Business Corporations Act, and he is not responsible for any deductions after that date. Therefore, the matter will be referred back to the Minister for reconsideration and reassessment in order that the assessment be reduced based upon these findings.

The appellant has been substantially successful and will have 50 per cent of his costs to be taxed.

Appeal allowed.