Norma E. Henderson, Executrix of the Estate of Harold Henderson v. Minister of National Revenue, [1990] 2 CTC 2086, 90 DTC 1618

Taylor, T.C.J.: —This is an appeal heard in Edmonton, Alberta, on May 18, 1990, against an assessment dated March 20, 1986 in which the Minister of National Revenue claimed against the estate in connection with the non- remittance of employee income tax deductions from a corporation in which the late Mr. Henderson had been a director. I make the statement that he was a director, recognizing but rejecting the assertions made in the notice of appeal to the contrary. Such assertions were not vigorously pursued at the hearing, and I believe properly so. Mr. Henderson was a director of Monk's Compact Rent-a-Car Ltd. ("Monk's") from the year 1969 up until his resignation on April 4, 1984. He held 26 per cent of the issued common stock of Monk's, the balance held during the period relevant to this appeal by Mr. Merlin Monk, and Elaine Monk. During this period of time, Mr. Henderson did not take an active role in the day to day management or operation of Monk's. He did however meet with the other directors on a regular basis—at least once a year for the combined directors and shareholders meetings. He was kept informed essentially on a need-to-know basis by Mr. Monk regularly, and Mr. Monk met with him when his advice or assistance—including on at least one occasion financial assistance—were important and useful. Mr. Henderson lived and had his own business, also operated under a corporate name—in Medicine Hat, Alberta, whereas the corporation Monk's was situated in Edmonton, Alberta, quite some distance away. Much of this detail was provided in evidence by Mr. Merlin Monk, and by Mrs. Norma Henderson, widow of the late Mr. Henderson. During all this time, Mr. Henderson received no salary, fee, dividends or income of any kind from Monk's, other than interest he might have earned on funds loaned to Monk's for short periods of time.

I will not dwell too much on the mathematical details of the amount of the claim made by the respondent in the notice of assessment at issue, because two points arose during the hearing. First, there had been an amount of "penalty" added to the basic unremitted tax deductions, and second, there was a question of whether the deductions for the month of March 1984 should be included. It was my understanding of the position of counsel for the respondent at the trial that an adjustment of the "penalty" was required at least, and that he believed the month of March 1984 should not be included in the amount at issue. Accordingly, in the event of the dismissal of this appeal, I leave the final amount to be determined and reassessed by Revenue Canada. As well as can be determined the period of time covered by the notice of assessment was from November 1983 to (but perhaps not including) March, 1984. The only issue therefore to be determined by the Court is that of the alleged liability of the appellant for the unremitted deductions.

Monk's entered into a period of serious financial difficulty late in 1981, which became increasingly oppressive during 1982 and 1983. All efforts by Mr. Merlin Monk to rescue the business failed, even though he continually reduced staff and expenses. During this period employee income tax deductions were kept up to date, or at least in reasonable order. It had been the office practice in Monk's for years to transfer to a separate bank account the entire payroll, each week, from which then were paid the employees' net cheques, and the various deductions, including income tax. As the financial difficulties increased during 1982 and 1983, it was not always possible to transfer the gross payroll to the special account (the bank would not permit it because of credit limits) but until the fall of 1983, employees' income tax deductions had been kept current. The deductions relevant to the notice of assessment at issue were those which finally the bank would not pay, or ones for which the bank would not honour the cheques. Monk's had been using a very sizeable line of credit from the bank during this period—several hundred thousand dollars, and the bank held as the main security a "debenture" as well as other forms of security such as personal guarantees. It was Mr. Monk's assertion that for part of 1982 and most of 1983 the bank “practically ran the business". On July 18, 1984, the bank under the powers and its debenture, appointed a receiver—Price Waterhouse & Co. On June 27, 1985, Price Waterhouse was discharged as receiver.

As noted earlier, the main evidence at the trial came from Mr. Merlin Monk, and in particular he detailed the way in which he had struggled in the period of more than two years to rescue the operation from its financial difficulties. He stressed in particular the on-going efforts about the remittance of the employees' income tax deductions, which efforts eventually broke down. He had always attempted to keep Mr. Henderson "insulated" from any of the business problem of Monk's—he did not confide in Mr. Henderson that there were very serious problems during 1982 and 1983, although Mr. Henderson was made aware that there were difficulties—business at Monk's was clearly not as buoyant as it had been earlier. Mr. Merlin Monk finally had been forced in personal bankruptcy in 1987, as was Elaine Monk.

Both parties at trial made reference to the state of the jurisprudence on this question of directors' liability, but both agreed that this situation could not easily be fitted into any one judgment previously on record.

Analysis

Before dealing with the crux of the matter, I should like to note that a major and commendable effort was made by counsel for the appellant to persuade the Court that subsection 227.1(2) of the Income Tax Act ("Act") served to invalidate the Minister's notice of assessment because the essential conditions for claiming by the Minister in the subsection had not been fulfilled—the claim had not been proved within six months. Essentially counsel asserted that paragraphs (a) and (b) of that section must be read together, and that Monk's had "commenced liquidation or dissolution proceedings" (paragraph (b)). Subsection 227.1(2) reads as follows:

Limitations. A director is not liable under subsection (1), unless

(a) a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court of Canada under subsection 223(2) and execution for such amount has been returned unsatisfied in whole or in part;

(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or

(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy Act and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.

I do not agree that there is any such six month restriction on the Minister in the circumstances of this case, and further I do not agree that the evidence suggests a conclusion that "the corporation had commenced liquidation or dissolution proceedings”, as that term must be interpreted in a purely legal format. While not raised as a defence at the hearing, paragraph (c) above was also alluded to, and I would merely point out that the action of the bank sending in a receiver under its debenture on July 18, 1984 (referenced above) does not constitute fulfilment of "the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy Act. . .”, as I understand the term.

I would now refer to the recent case of Clark v. M.N.R., [1990] 1 C.T.C. 2212; 90 D.T.C. 1094. While it may not prove to be the final word on the subject, it does cover everything I have to say on the general question to this point in time. There is a high degree of similarity between the situation of Dorothy Claire Clark (in the Clark judgment above) and that of the late Mr. Henderson here. It could even be said that Mr. Henderson was considerably more aware of the business operations, problems and prospects than was Mrs. Clark. He did meet with Mr. Monk regularly, and he did attend as a director annual meetings of the company—informally held as they might have been. Further, he was completely familiar with corporate business requirements to deduct and remit the income tax of employees, from the carrying on of his own business. I am quite satisfied that Mr. Henderson believed that he was “insulated” from any repercussions arising out of Monk's financial difficulties, or, as I see it, he would have taken steps very early on to separate himself from such problems. While there is no indication that Mr. Monk made a particular point of totally informing Mr. Henderson, equally there is no indication Mr. Henderson took any active or positive steps to be more informed about the financial difficulties—including those under appeal here—during the period of time he remained a director of Monks. The specific issue then comes down to one of whether Mr. Henderson was and remains (as the estate) liable for the unremitted deductions, unaware as he might have been of the impending difficulty. I am not aware of jurisprudence which would relieve any director of a company from the liability imposed under the relevant section of the Act, merely because he chose to so remain a director without being fully informed of the potential risk involved. It is indeed a sad state of affairs that Mr. Henderson, assisting Mr. Monk with certain financing, accepting a position as a director of the company, being informed regularly of its progress or lack of it, attending annual meetings, etc.—all out of consideration and friendship apparently, and with no monetary return at all, should now end up liable for the amount at issue here. My only conclusion is that Mr. Monk did not succeed in "insulating" his friend from the business responsibility, in the way his friend understood that relationship but that is not part of the issue before the Court.

The current section of the Act dealing with directors’ liability only came into force in 1981, and I gave some thought to whether that could alleviate this burden. However, it is just one more section of the Act, for which, perhaps unfortunately, taxpayers become responsible. The recent inclusion in the Act of this section does not serve in this appeal to sustain the appellant's position.

In principle, this case differs little from many cases on many subjects in which the appellant could point out to this Court that he was “not aware”, or “did not understand”, or even was “misinformed” about the transactions or circumstances under review. I am not able to see in these aspects of the matter any relief for the appellant.

Finally, again with reference to Clark, supra, I do not see that the circumstances surrounding the first month of default (apparently November, 1983) would serve to relieve Mr. Monk (if this were his appeal) from that month's liability, relief for which was conceded reluctantly, but conceded—in Clark, supra. There was nothing sudden or unexpected about the bank ceasing to honour cheques for deductions—it was a slow, and admittedly painful decline to finality. I am satisfied that when Mr. Monk realized he could no longer follow the established office procedure of segregating the gross payroll (whenever that happened) he consciously continued to accept the risk of deductions and possible—even probable—lack of remittance. If the evidence would not support such a favourable conclusion for Mr. Monk, even on this modest point, then I fail to see how it can be applied for the benefit of Mr. Henderson.

The appeal is dismissed.

Appeal dismissed.