Murray Osborne and Iris M. Osborne v. Minister of National Revenue, [1991] 2 CTC 2756, 91 DTC 1283

Margeson, T.C.J.: —These appeals are from assessments of the appellants as directors of Breton Industrial Marine Limited (the "Company") for unremitted income taxes by the Company for the years 1985 and 1986. A notice of assessment was sent to Iris M. Osborne dated March 4, 1988 and numbered 550971 and a notice of assessment was sent to Murray Osborne dated March 4, 1988 and was numbered 550970. The cases proceeded upon common evidence by agreement of the parties. The amounts of the assessments were not in issue nor was the relevant time period.

The evidence before me disclosed that the Company was incorporated in 1974 under the Nova Scotia Companies Act and that the two appellants became directors and the directorate of the Company did not change until it was put into receivership on February 14, 1986. The business of the Company was in the building and repairing of ships in Port Hawkesbury, Nova Scotia and Murray Osborne ran the Company and made the decisions. Iris Osborne played no role in the operations although she was kept informed of developments and received directors' fees. The Company did not have good financial results, was always looking for assistance and the bank loans were guaranteed by the Province of Nova Scotia which had a debenture against the assets. By year end October 31, 1984, the Company had assets of two million dollars but liabilities of over five million dollars. Prior to the receivership, the bank had decided it would extend no more credit and the Province of Nova Scotia would not guarantee the debt further. The only thing that could save the Company was the locating of an appropriate purchaser but for various reasons that did not happen in spite of earlier favourable inquiries.

The evidence is clear that once the receiver was appointed, he was in complete control of the Company and the directors had no authority whatsoever except to do as directed by the receiver. The directors at no time after the receiver was appointed took back control and even the hours of work were dictated by the receiver. The directors at no time resigned but were told that they need not do so. It is obvious that both appellants were aware of the failure to make remittances to Revenue Canada and Murray Osborne testified that when he questioned the receiver about them, he was told that the problem was one for the receiver and not for him.

The only issues remaining are two-fold:

(1) Did the Minister commence any action or proceeding to recover any amounts payable by the directors of the Company under subsection 227.1(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) more than two years after the appellants ceased to be directors of the Company?

(2) Did the directors of the Company exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances in accordance with subsection 227.1(3) of the Act?

Appellants' Position

The appellants argue that the Minister did not commence any action or proceeding as referred to in subsection 227.1(4) of the Act until more than two years after the appellants ceased to be directors. They take the position that they ceased to be directors of the Company on February 14, 1986 which was the date the Company went into receivership or at the latest on March 3, 1986 when the receiver appeared on the premises. The notice of assessment was issued on March 4, 1988.

The appellants admit that they did not resign formally but they argue that was not necessary. In support of this position they refer to the case of Perri v. M.N.R., [1990] 1 C.T.C. 2071; 89 D.T.C. 723 and argue that case is on all fours with the case at bar. According to their position, the appropriate statutory provision is section 73 of the Nova Scotia Companies Act, which states as follows:

73 If a receiver-manager is appointed by a Court or under an instrument, the powers of the directors of the company that the receiver-manager is authorized to exercise may not be exercised by the directors until the receiver-manager is discharged.

The appellants rely upon Swertz v. M.N.R., [1990] 1 C.T.C. 2160; 90 D.T.C. 1056 in support of their proposition that once the receiver was appointed the directors could do nothing to alter the receiver's decision not to remit the deductions. The appellants also cite with favour the case of Manago v. M.N.R., [1990] 2 C.T.C. 2459; 90 D.T.C. 1889. The appellants argue that they had acted in all circumstances of this case totally reasonably and conscientiously, having due regard to the pressures upon them in this situation, which were substantial. Further, they say that it does not matter if the directors consented to the bankruptcy and that no practical options were opened to them. They referred to various cases in support of the proposition that there is no liability for a director after a receiver is appointed and argue that if there is any liability it is only for November and December of 1985 because the Company had until February 15, 1986 to remit the deductions for January and by that time the receiver had been appointed.

Respondent's Position

The respondent argues that the appellants did not cease to be directors on February 14, 1986 but continued to be directors and never ceased to be such. The respondent does not accept the decision in Perri, supra, as good law and says it is under appeal. Further, it is argued that it was decided under the British Columbia statute which is different from that of the Nova Scotia statute and consequently the case is not applicable.

The respondent refers specifically to subsection 77(e) of the Nova Scotia Companies Act and says that the directors here could have obtained an Order from the Court as to what should happen to the creditors and further that under subsection 78(e) of the Nova Scotia Statute the receiver-manager is required to keep documents of his administration that are available during business hours for inspection by the directors and consequently, they could have determined what was owing to Revenue Canada. These sections are not in the British Columbia Act according to the respondent's argument and consequently a case decided under that Statute is not applicable in Nova Scotia.

The respondent submits further that sections 73, 77 and 78 of the Nova Scotia Statute do not terminate the position of the appellants as directors and they are liable.

It is the position of the respondent that an action or proceeding was commenced not more than two years after the appellants ceased to be directors, because they were advised of their liability by letter in June of 1987.

The respondent says that the case of Swertz, supra is the only case cited by the appellants that is applicable but distinguishes it in that in that case the receiver came in before the remittance was due. The requirement is to prevent the failure and it is not enough to exercise care on the 15th of the month. Care must be had from the beginning and all the circumstances of the Company known to the directors dictated that care was needed and that remittances were not made. The directors decided to pay salaries and not taxes, they took a risk and they are liable. The respondent quotes and relies upon Nice v. M.N.R., [1991] 1 C.T.C. 2537; 91 D.T.C. 628; White v. M.N.R., [1990] 2 C.T.C. 2566; 91 D.T.C. 54; and Keast v. M.N.R. (unreported), to emphasize that what is required is action to prevent the failure and not to react after the failure. There was no due diligence by the directors in this case according to the argument of the respondent.

Rebuttal

In rebuttal the appellants argued that just because a case is under appeal is no reason not to follow it. Further, they say that sections 77 and 78 of the Nova Scotia Companies Act do not help the respondent's position. The availability of information would not help the appellants’ position in the circumstances that they found themselves in after the receiver was appointed. They still had no power to act. They argue that a letter is not an action or proceeding and they refer to Manago, supra, and a discussion by Kempo, T.C.J. as to what might amount to an action or proceeding in concluding that there was no such action or proceeding in this case.

Analysis and Decision

It is clear from the evidence presented that the appellants did not resign as directors of the Company at any time and were therefore directors of the Company at all relevant times unless they ceased to be directors on February 14, 1986 or at the latest on March 3, 1986 as a result of the appointment of the receiver and the actual appearance of the receiver at the situs. If on either of these two dates the appellants ceased to be directors then the time limitation under subsection 227.1(4) of the Act would start to run.

The main case relied upon by the appellants is that of Perri, supra, and in that case Thorne Riddell Inc. were appointed receiver-managers and although they hired the appellants to carry on the day-to-day operations of the hotel business, they ceased as of the date of the receiver-manager's appointment to perform any of the duties of the director. Christie, A.C.J.T.C. concluded that the limitation period under subsection 227.1(4) of the Act does not relate to the time of the failure of the corporation to remit deductions but to a period of time after which a director of a corporation ceases to be a director.

What the learned trial judge meant by that statement, as I see it, was from a time when the directors ceased to be in a position in law and in fact to exercise the powers of a director. In that case he concluded that as of that date, they were stripped of their powers as officers of the Company and they were nothing more than employees under the receiver-manager's direction and were entitled to the benefit of the limitation period under subsection 227.1(4) of the Act.

The respondent suggests that the Perri case, supra, was wrongly decided, is under appeal and should not be followed. However, I disagree and accept the reasoning adopted by Christie, A.C.J.T.C. as reasonable and appropriate and the result that he reached as law at this time.

The respondent suggests that the Perri case, supra, was decided under the British Columbia Statute, which is different from the Nova Scotia Statute and is therefore not applicable. I cannot agree. I do not find anything in the Nova Scotia Statute which would dictate that a contrary decision should be reached. Indeed, section 73 of the Nova Scotia Companies Act is almost identical to section 110 of the British Columbia Statute. It is true that the Nova Scotia Statute has the added provisions of subsections 77(e) and 78(e) but they do not have the effect of enabling the directors to do anything more than under the British Columbia Statute and give them no more power to act and I accept the appellants' submission in that regard.

I find as a fact that the appellants ceased to be directors of the Company as of February 14, 1986 as that was the date the receiver-manager was appointed and indeed according to the evidence I find that the directors had no more power to act after that date.

I must now consider whether the Minister commenced an action or proceeding as referred to under subsection 227.1(4) of the Act not more than two years from that date. It is clear that the only thing that the Minister did in that time frame was to write a letter in June of 1987 advising them of their liability. The respondent suggests that amounted to “an action or proceeding" as contemplated by subsection 227.1(4) of that Act.

The meaning of the terms "an action or proceeding” was discussed by Kempo, T.C.J. in the case of Manago, supra, and the best interpretation that can oe given that would be of assistance to the respondent here is that the learned trial judge concluded that the terms "were not isolated and restrictive in nature" and included “an assessment made under clause (10) of section 227.1 of the Act, and further that the terms were not restricted “to proceedings that were solely legal in nature" and they included “the administrative act of recovery of the liability in the form of a notice of assessment or reassessment". However, there is nothing further in that case or any other cases to which I have referred to that will be of assistance to the respondent, nor has any definition been suggested to me, nor does any definition appear to be included in the Income Tax Act, nor in the normal dictionary meaning of the terms, that would go so far as to include the mere writing of a letter such as was done here.

I find on the facts of this case that the appellants ceased to be directors of the Company more than two years before the Minister commenced any action or proceeding as contemplated by subsection 227.1(4) of the Act.

In light of my decision on these points, I need not consider the arguments under subsection 227.1(3) of the Act.

The appeals will be allowed with costs and the assessments of liability under section 227.1 of the Income Tax Act will be vacated.

Appeals allowed.