Evans Premachuk v. Minister of National Revenue, [1991] 2 CTC 2630, 91 DTC 1436

Kempo, T.CJ.:—This appeal arises from a notice of assessment Number 555283 dated August 16, 1988 addressed to the appellant, Re: Fleetwood Ventures Ltd. in Bankruptcy, in respect of:

The liability under subsection 227.1(1) of the Income Tax Act, section 40.1 of the British Columbia Income Tax Act, section 22.1 of the Canada Pension Plan and section 68.1 of the Unemployment Insurance Act, 1971 in the amount of $14,772.59 being the amount of the unpaid deductions, interest and penalties payable by Fleetwood Ventures Ltd. in respect of Notice of Assessment dated April 24, 1987.

The case was heard in Penticton, British Columbia on May 6 and 7 of 1991. Counsel for the appellant, by way of opening statement, advised the Court that two issues were bein raised. The first questioned the directorship status of the appellant during the times Fleetwood Ventures Ltd. had failed to remit the income tax withholdings and the second, expressed in the alternative, asserted exculpation under the due diligence provisions of subsection 227.1(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Facts

The appellant, a retired lawyer, practised law in The Pas, Manitoba from 1963 to approximately 1982. During the course of his practice, he met Mr. Joe Higgins, a salesperson and entrepreneur. On the advice of Mr. Higgins, the appellant and his wife purchased a hotel in The Pas in or around 1978. This hotel, known as the Wescana Inn, developed into a successful ongoing business and is still owned by the appellant today.

In 1986 Mr. Higgins again approached the appellant with a proposal to invest in a hotel in Sparwood, British Columbia which was located in a mining community in the southeast corner of British Columbia some five hours drive from Kelowna. The hotel, called the Black Nugget Motor Inn (“Black Nugget Inn"), was to be acquired through a receivership sale. An infusion of capital was needed to secure the necessary financing. The hotel was to be managed by Mr. John Schur and his wife, both of whom were experienced in hotel management. Acting from a sense of obligation the appellant felt towards Mr. Higgins for his opportunity to purchase the Wescana Inn, he agreed to invest a sum of capital.

Fleetwood Ventures Ltd. ("Fleetwood Ventures") was incorporated in May of 1986 under the laws of British Columbia. It acquired the Black Nugget Inn on June 15, 1986. The purchase price was $1.4 million. Mr. and Mrs. Schur each invested one-half of $100,000. Mr. Higgins, the appellant, and the appellant's wife each invested one-third of $100,000. Mr. and Mrs. Premachuk also contributed an additional $5,000 each. According to the September 15, 1986 minutes of the meeting of the Board of Directors (Mr. and Mrs. Schur being the stated directors) all the contributions were advanced to Fleetwood Ventures by way of shareholder loans. Further, the Board resolved to issue the following common shares at a par value of $1/share:

The remainder of the purchase price was financed through the Federal Business Development Bank through the efforts of Mr. Schur. The appellant and his wife refused to give any personal guarantees to this institution; the latter had given him the impression that the projection statement looked good and that "the thing was going to fly” [T. 55]. The reason for structuring the financing in the manner described above was explained by the appellant in the following terms:

My recollection of it was that we basically were looking to get our money back and if there was any appreciation on the shares then we would, you know, get a capital gain on that but we tried to—wanted him to set it up that we would get the money—the money would come to us first without declaring dividends or anything like that [T.16].

The appellant explained his view of the type of relationship he and his wife would have to Fleetwood:

We had basically our own operation to worry about and we really weren't concerned about what was going to happen here, as long as it started showing a profit. And I believe we tried to set it up that our money went in, would come back without leaving declared dividends and that. We wanted to get our money back as soon as possible and we weren't going to be involved in the day to day management because I was satisfied that John Schur, with his experience, could run the operation. Basically, we relied on his experience [T. 18].

Following the June 15 acquisition, the appellant did not become involved in the management of the Black Nugget Inn although he did visit the hotel on a couple of occasions during the fall of 1986. Mr. and Mrs. Schur were the sole directors and the resident-managers. A local strike lasting until September or October of 1986 had a negative impact on the operations. Most of tne information the appellant received about the business came through periodic verbal reports from Mr. Higgins who was also a business partner with Mr. Schur in other hotels. In the fall of 1986 the appellant and his wife moved to Kelowna, British Columbia and in 1987 they purchased a motel called the Pandosay Inn. Mr. Higgins continued to live in Manitoba until he too moved to Kelowna in June of 1987.

The appellant testified that he had never attended any shareholders’ or directors' meetings with respect to matters concerning his appointment as a director. No minute of any meeting appointing or electing the appellant was produced, and counsel asserted the only documentary evidence likely in existence on this subject was a consent to act as a director, a notice of directors, and a minute allegedly removing Mrs. Schur as a director and officer of the Company. The subject matter of this particular minute was described as such in the Summers' letter, infra. However since it could not be found, it was not produced.

Shortly after February 20, the appellant received a letter sent by registered mail from Mr. P.L. Summers, Fleetwood Ventures' solicitor. The letter stated that Mrs. Schur had resigned as an officer and director and that John Schur was removed as president. The appellant was asked to sign certain documents enclosed with the letter which included a notice of directors and a consent to act as a director together with a minute of a meeting removing Mrs. Schur as a director and officer. The first two documents had been earlier-dated (February

4) ostensibly by Mr. Summers or someone in his office.

In response to a question regarding his declared reticence in signing the documents, the appellant responded:

Well, I was a bit concerned about the operation of the company. Joe Higgins had indicated to me that he was concerned about the way the company and the hotel was being managed [T. 28].

Well, from what Joe was saying that there were some complaints of some bills not being paid and he had to be on COD IT. 29].

The appellant testified that Mr. Summers was pressuring him to sign the documents out of his concern that the company could not function without two directors. Paragraph 10.2 of Fleetwood Ventures' Articles of Incorporation required two directors; section 132 of the British Columbia Company Act required at least one.

The appellant testified that he did not sign the consent and notice documents until the latter part of March. However following its receipt the appellant and Mr. & Mrs. Higgins instructed a certified general accountant to travel as soon as possible to Sparwood to conduct an audit. He said he was looking for some independent evaluation of the financial status of the corporation before signing the consent and notice. His testimony was as follows:

Q. You indicated that there was a certain reluctance on your part to sign the consent some time in March and send it back to Fleetwood's solicitor. What was your, in your words, your concern?

A. Well, I was a bit concerned about the operation of the company. Joe Higgins had indicated to me that he was concerned about the way the company and the hotel was being managed. And at that time, this is around February, I said to Joe let's get Ron Lebreck, who is a CGA, a general accountant.

Q. Certified General Accountant?

A. Yes.

Q. CGA.

A. Yes. And he was living in Kelowna and had lived in The Pas. I knew him very well and I asked him. He knew John Schur also so I said to John, well, let’s get Ron to go to Sparwood and do a general audit and just see what's going on, see if he can make any sense of what—if there's no business or whatever, let's do an audit. In general terms, let's do an audit on what he's doing.

Q. And what prompted this decision again, sir?

A. Well, from what Joe was saying that there were some complaints of some bills not being paid and he had to be on COD.

Q. Was there anything else?

A. Just that there was—there seemed to be a discrepancy between the sales and the profits. [T. 28-29]

He had this to say with respect to the circumstances surrounding the directorship request:

Q. All right. Was your discussions with Mr. Higgins at or—was it related to your receipt of the documents and the directorship?

A. No, I didn't—I never made an issue with Joe and I think when he said well, I’m going, the lawyer wants me to pick up those documents, I think at that time I expressed a little concern. You know, I didn't want to sign it, but if the lawyer says that the company can't operate so I have to sign and it was a heck of a dumb move on my part but the pressure was there [T.29].

Q. Now, were you—when you asked Mr. Lebreck on February 20 or when you sent this letter on or about February 20 or when you sent this letter on or about February 22, 1987, where was the documents that were—where were you in respect to the directorship and the documents you apparently received?

A. They were still on my desk, unsigned.

Q. Did you actually receive them by then or not?

A. I must have received them by that date. I’m very nebulous in that. I would say about that day and I think maybe if it could have been like in B.C. it's not—like two days is a reasonable time to get a letter. I don't know what it is now, but at that time, and I would strongly presume that would be the day I got the letter. Now I’m sorry I can't be more specific.

Q. Well, in any case, what happened next after that? You sent this letter to Mr. Lebreck. You also, you indicate in your evidence that sometime later in March you signed the consent and the notice and sent it back to Mr. Summers. What transpired next?

A. About March the 23rd or so Mr. Lebreck went to Sparwood and spent about three days there doing an initial audit and he came back in about several days later. I think it was March the 31st he came over and told me exactly what was happening and basically that there were not remittances to the Tax Department on the employees' deductions.

Q. This would be March 31st?

A. That's right.

Q. Okay. And then what happened?

A. I asked him to go back and do some more checking and, you know, whether he could identify where the money has been going. So he went for about four or five days in April, about mid-April, and then he came back and he says you have—you can suspect but you can't prove anything, that there was any problem, you know. Like it didn't look good.

Q. Well, maybe you could be a little bit more expressed as far as what other—

A. Well, he said also—

Q. He said no remittances—I'm sorry, but he said no remittances. Is there anything else that he said beyond that?

A. Well, he said that there—

[T. 31-33].

The appellant confirmed he had signed the consent to act and notice of directors around March 23 and inadvertently had not changed the February 4 date. He then gave them to Mr. Higgins who delivered them to Mr. Summers. The notice was filed with the Registrar of Companies on March 24. It was at this same time the accountant finally visited the Black Nugget Inn and conducted a three-day review of its operations. About one week later (March 31) the appellant was told of the Company's failure, since November of the previous year, to remit employee withholding amounts to Revenue Canada. Upon receiving this report the appellant described his reaction thusly:

Well, I had to do something in a sense to try to recover the remittance—to make the remittances and to make sure that after a certain date that there were no further defaults and that the remittances went into the department. So I called a meeting, I asked Higgins and I said let's go to Sparwood and have a meeting, and go to Cranbrook, have a meeting with FDB and let's see what we can do, and what are we going to do with John. I said we've got to do something with him. I said the only thing I can see if these guys can’t do the job—like we've got a good manager in The Pas in our hotel—[T. 33-34].

On April 16 the appellant sought legal advice and was advised to resign any position he might hold. The appellant did so, and he signed a letter of resignation as director effective that date. The appropriate notice of change of directors was received for registration by the Registrar of Companies on April 30.

Following a meeting held on April 29, Mr. Bill McGooska (an employee of the Wescana Inn) was brought in from Manitoba to manage the day-to-day operations of the Black Nugget Inn and to ensure all liabilities were paid. Fleetwood Ventures made all current remittances to Revenue Canada thereafter, but it continued to have financial difficulties and was assigned into receivership in October.

The following testimony of the appellant is pertinent:

Q. Now, Mr. Premachuk, earlier you were talking about a meeting on the 29th of April apparently in Sparwood with Mr. Higgins and Mr. Schur. Now, you were talking about signing the resignation on the 16th of April in Kelowna in a lawyer's office.

At what time did you make up the decision with Mr. Higgins to proceed to see what you could do to arrange things for the company so that the apparent remittances would be paid?

A. That's about that time in April that I think—alter Lebreck came back and gave us the bad news, just around that time that I resigned. I resigned but still 1 had a vested interest, and I felt I had a vested interest, in recovering the losses and I proceeded on and tried to provide some guidance i in getting the people involved to, you know, make the corrections. And I sure felt the frustration of how when you're a lawyer you tell people to do these things and then you expect they go out and do them. But it’s amazing. You know, it's not done just like that. It’s very frustrating.

Q. In any case, you resigned on the 16th. Then you subsequently journeyed to Sparwood and had the meeting on the 29th and thereafter Mr. McGooska, who was the manager from your hotel in The Pas, was brought out to continue the operation of the company.

A. That's correct.

Q. And what was your involvement, if at all, after that?

A. That was basically it. I had full confidence in Mr. McGooska and he operated it. If it didn't succeed—you know, if it didn't succeed with him then there wasn't too much you could do unless, you know, the damage had been done too bad by the time we got him.

Q. So this was done after you resigned as a director, your efforts to restructure the management of the company we'll call it.

A. That's correct. I felt I had an investment and still had an interest. One way or the other it was—

Q. I’m showing you this letter dated—well, it’s not clear when it's dated. It’s shown as received on the 15th of October, 1987 and it's signed Ron Lebreck, CGA.

A. It looks like April the 15th, ‘87. And this is on the—I recognize this stationery and I recognize the writing of Mr. Lebreck, and I believe at that time there was a— he had entered into a discussion with the Revenue Canada regarding errors that he had made on the assessment and I think there was—as he mentioned, he was asking information about possible errors in duplicate assessment of the penalty and incorrect deductions. So he apparently—well, was in contact with whoever it was in the Department to try to straighten it out.

A. So essentially then, sometime after Mr. Lebreck came back from his audit in Sparwood, he had this conference with you, he sent this letter to Revenue Canada. I'd just like you to—this is received on the 15th, so obviously it was before your resignation, which is apparently the 16th. The exhibits attached there, there's an audit statement of account dated March 23, 1987. Do you see where I am, Mr. Premachuk?

A. Yes, on the first—

Q. When was the first time that you became aware that there was a failure to remit taxes?

A. That would be when Mr. Lebreck came back the first time. March, end of March or something like that.

Q. You indicated, however, sometime in February you were having discussions with Mr. Higgins about problems. Was there any discussion about remittances at that time, can you recall?

A. There could be. You know, I would think there would be, but maybe there was a suggestion that he wasn't taking payments. And I think if that’s the case I think that’s why I had Labreck go. I know the operation wasn't—he wasn't doing what he should be doing.

Q. In any case, Mr. Labreck came back and he advised you of the circumstances and thereafter not only did he respond to Revenue Canada but you also responded by seeing a lawyer and resigning on the 16th of April, is that correct?

A. Yes [T. 36-40].

To extrapolate, I find the following as fact:

— By February 20, 1987 the appellant was generally aware of operational shortages and the probability of non-remittances tax withholdings;

—Shortly thereafter he received the request to act as director;

—On February 22 he and the Higginses authorized an accounting review which commenced March 23;

—He signed the consent dated February 4 around March 23;

—He received the accountant's information concerning the remittance failures on March 31 and then told the accountant to go back for another check to determine where the money may have gone;

—By April 15 the accountant had corresponded with Revenue Canada concerning the non-remittances; and

—The appellant resigned April 16 and attended an April 29 meeting in the capacity of an investor.

The Law

Subsection 227.1(1) of the Income Tax Act provides that the directors of a corporation are liable to pay the employee's tax withholdings where the corporation so defaults. The Income Tax Act does not provide any definition with respect to a director.

The applicable corporate law in British Columbia's Company Act ("Company Act") provides:

1. (1) “director” includes every person, by whatever name he is designated, who performs the functions of a director;

136 (1) No election or appointment of a person as a director is valid unless

(a) he consented to act as a director in writing before his election or appointment; or

(b) if elected or appointed at a meeting, he was present and did not refuse at the meeting to act as a director.

(2) À consent in writing given under subsection (1)(a) is only effective until the next following annual election or appointment of directors unless the consent states it is effective until

(a) revoked; or

(b) a date or time stated in it,

148. Every act of a director is valid, notwithstanding any defect that may afterwards be discovered in his appointment, election or qualification.

Submissions

For the appellant:

(1) There is a serious question whether there was ever a meeting during which the appellant could have been validly elected or appointed. He had never attended one. He was not made aware of any minute issued on this subject and even if there are been any such meeting there was no prior written consent nor his personal attendance. Therefore, and following the statutory provisions, mere written consent to act is not sufficient to confer a de jure directorship in the absence of corporate action via an actual and proper election or appointment. Nothing has been located to establish with any requisite degree of certainty that an election or appointment had been attempted by the Board or that one had properly occurred.

Mr. Higgins was resident in Manitoba. The signing of the consent and notice of directors was done by the appellant primarily as an accommodation to alleviate the concerns of the company's lawyer who was pressing. The signing occurred prior to receipt of the accountant's advice concerning the non-remittances and after the date payment of the February withholdings were due to be remitted (i.e., by March 15).

The appellant's mere belief he may have been a director does not transpose his legal status to that of a de jure director. In other words neither is written consent, nor his beliefs, nor his acts, nor all of them could make it so. The Company Act mandates an election or appointment; there is no provision therein for waiver. Any tacit acquiescence by the Messrs. Higgins and Schur is not curative. The appellant’s acts were not that of a de facto director either as he had not assumed any mantle of power, subjectively or objectively. Indeed counsel for the respondent is about to complain that the appellant did nothing at all under the due diligence argument.

The indoor-management rule, as expressed in section 148 of the Company Act, supra, would apply only where Fleetwood Ventures was seeking to avoid its liabilities by raising a defence involving a want of authority on the part of a putative director. Therefore it is not applicable here. In any event, there is a distinction between validating the appointment of a director and validating the acts of an improperly appointed one. The curative provision (section 148 of the Company Act) relates only to the latter: Oliver v. Elliot (1960), 30 W.W.R. 641 at 644, 645; 23 D.L.R. (2d) 486 (Alta. S.C.); see also McKenna v. Spooner Oils Ltd., [1934] 1 W.W.R. 255 (Alta. S.C.) where it was held that acquiescence does not operate to revive or cure an otherwise ultra vires attempt by corporate directors to do what was not permitted by the governing legislative and constitutive provisions.

(2) In the alternative, the due diligence provisions of the Income Tax Act should be applied. The appellant was without unfettered power or right, de jure and de facto, to prevent the company's failure to remit taxes for the month of February 1978. The consent and notice was not intended to and did not operate retrospectively from March 23 back to February 20, February 4 or to any previous time. The failure to change the dating on the documents was due to the appellant's inadvertence.

From March 20/23 to April 16 the appellant had acted diligently, reasonably, and prudently. He did all that he could under the circumstances which was to press for and gather information as quickly as he could through a hired professional. The Black Nugget Inn was a five-hour drive away. The three-week period was not time enough to turn things around. Once he was aware of the actual situation and of the defect in his status and of his liabilities he had promptly resigned. This was what a reasonable individual would do in comparable circumstances.

For the respondent:

(1) It is inappropriate for the appellant at this stage to rely on the provisions of the Company Act when on February 22 or later he had either believed he was a director or that he was certainly to become one. That he was to be a director, given Mr. Higgins was living in Manitoba, was inevitable. Everything he did before and after he signed the written consent and notice of directors confirmed this as they were the acts of an individual performing the functions of a director.

The dictionary definition of the word "appointment" infers positive actions which in this case comprised of the offer in the Summers' letter followed by the appellant's acceptance thereof via the signing and delivery of his consent together with his act as a director in endorsing the notice of directors as president, all of which was pre-dated to February 4. Counsel expressed it thusly:

. . . It is the entire arrangement that is looked at in its totality to produce an appointment. I don't believe it's necessary to have a formal meeting, to have formal discussions. The parties knew where they were going and consequently simply put the documentation forward, eventually signed it and returned it to the registrar [T. 127].

So consequently I think by looking it the totality of the evidence, you see that he is a director. And taking in the picture in a broader sense which I think is important, you see that he is a director really throughout the period because he is acting as a director. He is doing certain functions which are in his capacity as director in the best interest of the company [T. 128].

The appellant should be considered a director in this case because everyone's mindset was applied and directed to that end. Because the Income Tax Act has no definition of a director it is therefore not limited to situations "where you are a director pursuant to the provisions of statute or an Act of Parliament or whatever it might be. It simply says director" [T. 130]. In this case the appellant, in requesting the audit and in signing the notice of directors, was performing the functions of a director.

(2) With respect to the due diligence aspect, the appellant relied on others to do what he should have done promptly by himself once he was suspicious or aware of irregularities. The three-week delay before the accountant went out during which the appellant did nothing was not reasonable.

Once the accountant had told the appellant of the non-remittances at the end of March, no positive action was taken by him during the immediately following two-week period except to resign. No due diligence has been shown to have been exercised between March 20/23 to April 16 which is the time frame during which the appellant had subjectively believed he was a director de jure. Simple continual monitoring of the situation does not absolve the appellant as it had not been directed to prevent Fleetwood Ventures' failure in making the remittances of tax. The appellant had taken no action whatever to prevent this failure for either of the months of February or March of 1987.

Validity of Assessment

The notice of assessment addressed to the appellant dated August 16, 1988 contains the following information:

Revenue Canada Taxation

Revenu Canada Impôt

NOTICE OF ASSESSMENT

AVIS DE COTISATION

Date of Mailing Identification Number Taxation Year Taxation Control Office

August 16, 1991 19 Surrey

Evans Premachuk COMPLETE AND MAIL THIS TOP PORTION WITH YOUR 986 August Court REMITTANCE.

Kelowna, B.C.

MAKE YOUR REMITTANCE PAYABLE TO THE RECEIVER VIY 719

GENERAL.

REMITTANCE ENCLOSED

Re: Fleetwood Ventures Ltd.

in Bankruptcy

Account No. VFZ 66058 2

Previous Amount Tax		Penalty Instalment Int. Arrears Int. Refund Int. Balance
N/A	N/A N/A		N/A	N/A	N/A	$14,72.59

The liability under Subsection 227.1(1) of the Income Tax Act, Section 40.1 of the British Columbia Income Tax Act, section 22.1 of the Canada Pension Plan and Section 68.1 of the Unemployment Insurance Act, 1971 in the amount of $14,772.59 being the amount of unpaid deductions, interest and penalties payable by Fleetwood Ventures Ltd. in respect of Notice of Assessment dated April 24, 1987.

The appellant's notice of appeal was dated 25 April 1990. The respondent's reply thereto purporting to further particularize the indebtedness was dated January 14, 1991.

In Joseph Leung v. M.N.R., [1991] 2 C.T.C. 2268; 91 D.T.C. 1020 (T.C.C.) Rip, J. at pages 2274-78 (D.T.C. 1023-28) considered the validity of a notice of assessment virtually identical in wording (except the amounts and the names of the taxpayers) to the one at bar. At pages 2277-78 (D.T.C. 1027-28) respectively he noted the following matters which are equally applicable hereto:

Notification of the aggregate of amounts assessed under four statutes, in my view, does not inform a taxpayer of a particular amount assessed under one of the statutes. The assessment is incomplete.

The notice of assessment sent to Leung also refers to notices of assessment previously sent to Eastern. Once a person ceases to be a director of a corporation it may be very difficult, if not impossible, for the person to obtain from the corporation any particulars relating to assessments issued against the corporation which have led to him or her being assessed. Thus the respondent on his own initiative must provide the taxpayer with the documentation referred to in the notice of assessment even if the documentation relates to assessments of other taxpayers. (See M.N.R. v. Huron Steel Fabricators (London) Ltd. and Fratschko, [1973] C.T.C. 422; 73 D.T.C. 5347.)

An assessment must state clearly the amount assessed so as to make the taxpayer aware of it. If supplementary information is required to clarify an assessment, the assessment is not complete. This is the situation in the appeal at bar.

Further, and similarly to Leung, the notice of assessment against Fleetwood was not adduced in evidence nor transmitted to the Court. Counsel for each party have been afforded the opportunity of making written representations solely with respect to the applicability of the Leung decision.

As the facts in Leung and the analysis, reasoning, and conclusion herein of Judge Rip are essentially non-distinguishable from the situation at bar, there is no reason why the outcome for this taxpayer should be any different. Accordingly the issues as initially outlined need not be decided.

Conclusion

The appeal is allowed, with costs, and the assessment is vacated.

Appeal allowed.