Merlyn Lee Irvine v. Minister of National Revenue, [1990] 2 CTC 2560, 91 DTC 91

Taylor, T.CJ.:—This is an appeal heard in Regina, Saskatchewan, on September 24, 1990, against an assessment dated August 11, 1988, under subsection 227(10) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The notice of assessment also included amounts with reference to the Saskatchewan Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act, but the only matter at issue in this appeal is that part dealing with employees’ income tax deductions covered by section 153 of the Act.

The notice of appeal sets out:

— The taxpayer, Mr. Merlyn Lee Irvine, who was initially an employee, was given shares in the corporation Centaur Steel and Sandblasting Ltd. as consideration for the use of his equipment and his labour.

— Although Mr. Irvine is shown to be a director in the records of the Province of Saskatchewan Corporations Branch, it is his contention that he was unaware of his appointment and that the appointment was made without his consent or knowledge.

— There appears to be no Corporate Minute Book or a Resolution appointing Mr. Irvine a director. A Form 6 was completed October 28, 1985, and filed November 28, 1985, appointing Mr. Irvine a director February 9, 1985, however, Mr. Irvine’s signature is not evident.

— The annual return of the Corporation, filed September 10, 1985, which calls for identification of shareholders (excepting directors) shows Mr. Irvine as a shareholder, but not a director.

— It is our contention that Mr. Irvine was not aware of the fact that he was nominated as a director and was, therefore, not able to obtain any information as to the financial situation of the Corporation.

For the respondent, in the reply to notice of appeal, the assumptions of fact were:

— the Appellant was given shares in Centaur Steel Ltd. (the "Company");

— the Appellant is shown to be a director of the company in the records of the Province of Saskatchewan Corporations Branch;

— the Appellant became a director of the company on February 9, 1985 and ceased to be a director on August 29, 1986;

— the Appellant failed to exercise the degree of care, diligence and skill to prevent the failure . . . herein that a reasonably prudent person would have exercised in comparable circumstances.

The dispute in the appeal dealt with two points relied upon by counsel for the appellant. First, that Mr. Irvine was not a director (see notice of appeal)— and second, if he was a director, he ceased to be a director on October 31, 1985, not on August 29, 1986 as contended by the respondent. The significance of these two dates was simply that the assessment under attack had been struck on August 11, 1988—which would be more than two years after October 31, 1985, but not longer than two years after August 29,1986—see subsection 227.1(4) of the Act:

No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after he last ceased to be a director of that corporation.

On the first question—the appellant's testimony indicated that the point of him being a director was never discussed between himself and Leonard Siemens ("Siemens"), President of Centaur Steel Ltd. ("Centaur"); that he never agreed to accept such a position; and that he was not aware that he was so regarded or named until about the end of October 1985. This information that he "was a director" came from the Saskatchewan Department of Labour— Labour Standards Board, after he had made enquiries about his position vis- à-vis Centaur, for a claim for back wages.

Exhibit A-2, copies of information regarding the corporate filings of Centaur with the Province of Saskatchewan, was introduced by agreement of the parties and it included the following letter filed with the Corporations Branch — Province of Saskatchewan on February 15, 1985:

Centaur Steel Ltd. 79 Hudson Dr. Regina, Sask. P.H. 586-6767 545 2W1

February 15, 1985

Dept, of Consumers and Commercial Affairs

Corporations Branch

1871 Smith St.

Regina, Sask. S4P 3V7

Dear Sir,

Re: Centaur Steel Ltd. Corporation No. 571377

At a meeting held on Feb. 91985 a motion was passed to sell 49 shares of class A stock representing 49% of the Company to Merlyn Irvine, Box 66, Lang, Sask.

This stock has been sold to Merlyn Irvine and he now is Sec. Treas. of the Company and a Voting Director.

Please make the necessary changes to reflect this change in share ownership.

Yours truly,

Leonard Siemens

Another document contained in Exhibit A-2, filed on September 10, 1985, showed Merlyn Irvine listed as a shareholder (49 shares) and as a director, and one dated October 28,1985 filed on November 28, 1985 was the formal certificate signed by Siemens registering the fact that Merlyn Irvine had become a director on February 9, 1985, as indicated in the letter directly above. It would appear that from these documents the determination was reached by the Labour Standards Board that at the end of October 1985, Merlyn Irvine was indeed a director, and that his office was that of Secretary Treasurer, whether with or without notification or confirmation from Irvine.

We now return to the date of February 9, 1985 and its significance because of the meeting on that date (above). According to the testimony of Mr. Irvine, it was about that date that he (Irvine) and another man, a Mr. Gross ("Gross"), were requested by Siemens to become "partners" in the Centaur operation. Gross made Irvine aware of Siemens' rather spotty business background, and turned down the offer himself. However, the appellant became directly interested in the operations of Centaur and in providing some credit basis at his own banking establishment (a Credit Union) for Siemens and Centaur.

One of the conditions of this extension of credit and banking arrangements by the Credit Union was that he, Irvine, would co-sign all cheques, including his own paycheques, from that time on.

The essential facts therefore in summary, would seem to be:

— A meeting about February 9,1985 at which Irvine and Gross are offered a business arrangement with Siemens in Centaur.

— Gross turns it down and has no more to do with Centaur.

— Irvine continues to rent machinery to Centaur, and continues to be employed there.

— He obtains some form of credit for Centaur, because of his own good credit standing.

— He co-signs cheques from there on.

— On February 15, 1985, Siemens sends a letter, filed with Labour Standards on February 18, 1985 as above.

— Irvine approached Labour Standards about the end of October 1985 for help in obtaining back wages and then (according to his testimony) for the first time he is informed he is a director of Centaur.

During the hearing, counsel for the respondent introduced copies of some parts of the Saskatchewan Business Corporations Act, R.S.S. 1978, c. B-10 ("Saskatchewan Act”), and he noted particularly the following extractions:

13.(n) "director" means a person occupying the position of director by whatever name called and "directors" and “board of directors” includes a single director.

[Emphasis added.]

97.(1) Subject to any unanimous shareholder agreement, the directors of a corporation shall:

(a) exercise the powers of the corporation directly or indirectly through the employees and agents of the corporation; and

(b) direct the management of the business and affairs of the corporation.

Counsel for the respondent stated for the Court that Cybulski v. M.N.R., [1988] 2 C.T.C. 2180; 88 D.T.C. 1531 was authority for the proposition that the onus to disprove the Minister's assumption (that is that, he, Irvine was a director at the relevant times) rested with the appellant, and counsel referred to page 2183 (D.T.C. 1533) of Cybulski, supra: "The onus is, of course, on the appellant to establish on the balance of probability that this assumption is wrong."

Analysis

From the summary of the points noted above regarding the communications and the evidence of Irvine, on or after February 9, 1985, I find as a fact that as at that date Irvine became a director of Centaur. It is my view that whether he realized the responsibilities involved, that is the position which Irvine attained. He may have even wanted or demanded that role as a result of accepting the more active duties in the company—supporting credit requirements, and co-signing cheques, at least. But the reason he became a director is unimportant to this decision. I find nothing in the Saskatchewan Act which would dictate that the filing of the letter dated February 15, 1985, with the Department of Consumer and Commercial Affairs, its receipt by that Department on February 18, 1985, nor the later formal documents filed on November 28, 1985, supra, dedicates any of those dates, as the significant time at which Irvine became a director of Centaur. Neither do I find anything in the above Saskatchewan Act which requires any form of consent from any allegedly appointed director to be provided to the Province, nor is it apparent to me that any particular formality is required—a situation which contains the prospect of some question being raised, as it has in this matter, since a person apparently might become a director without any awareness of it at all.

In my view, the position of counsel above, regarding the appellant's onus, is a slight extension of the judgment in Cybulski, supra, at least as I would apply it in this appeal. In Cybulski, supra, the appellant had been a director—and the respondent's position in that appeal, was that he had so remained during the critical period. As indicated quite properly by the judge in that matter, it was up to the appellant to demonstrate that he was not a director—that he had resigned or no longer occupied that position. To the satisfaction of the judge, that was done by Cybulski. In this matter, the basic position of Irvine is that he was not and had never been a director of Centaur, and barring evidence to the contrary that simple statement given under oath—that he had never been a director—might be taken at face value normally. The problem is, as I have noted above, his own knowledge, consent, or acquiescence to being a director, does not appear to be a prerequisite according to Saskatchewan legislation. That would be a difficult call indeed—in a director's liability case—if the on!y evidence was the sworn statement of the taxpayer. However, in this matter, we are not so restricted—we have additional evidence—the documents filed by Siemens on February 15, 1985, supra, stating that he was a director, and Irvine’s conduct after February 9, 1985. But of great additional support, we have a letter filed by Irvine himself with Siemens (according to his testimony) dated October 3, 1985 (Exhibit A-1) which reads as follows:

Box 66, Lang, Sask.,

October 31, 1985.

Mr. Len Siemens,

Centaur Steel Ltd.,

79 Hudson Drive,

Regina, Sask.

Dear Len,

Please accept this letter of resignation from the Board of Centaur Steel Ltd. effective midnight October 31, 1985.

I will sell my shares at par value of $1.00 on November 1, 1985. Please notify the Department of Corporate Affairs immediately.

Wages incurred in 1984 and 1985 prior to becoming a Director of Centaur Steel Ltd. are to be paid in full by December 31, 1985, otherwise legal action will have to be taken.

I will lease the necessary shop equipment to Len Siemens and Centaur Steel Ltd. for $200.00 per month commencing November 1, 1985. If no payments are made within 90 days, I will pick up said equipment without notice.

Merlyn Irvine.

I have great reservations about this document, both because it was unsigned and because of the lack of clarity in Irvine’s answers regarding it. However, he presented it and swore that he had delivered the original to Siemens on that date. Siemens, according to the appellant, just tossed the letter aside and except for minor occurrences Irvine had little to do with Siemens after that. If the letter stands for anything, the tone, content and context of it leave no room for doubt regarding the role in the company from which Irvine suddenly wished to be released—that of director. As indicated above, I would be content in deciding that Irvine was a director from February 9, 1985 on, to rely on the notification to the Province (Exhibit A-2) and Irvine’s own conduct thereafter. But the confirmation of that position using this letter (Exhibit A-1) that the appellant was a director is helpful. However it is only one point to be considered. The other critical point is the date on which he "ceased to be a director”, as those words are used in subsection 227.1(4) of the Act. For assistance in this review we can turn to a judgment of this Court, referenced in Court by counsel for the appellant, Perri v. M.N.R., [1990] 1 C.T.C. 2071; 89 D.T.C. 723 at 2074 (D.T.C. 725):

As I understand it, it is the intention or object of subsection 227.1(4) to fix a limitation period that runs from a time when an individual ceases to be in a position in law and in fact to exercise the powers of a director to rectify the failure of the corporation to deduct or remit or both. I regard that as being the correct meaning of the phrase "ceased to be a director" in subsection 227.1(4). To hold that those words in all circumstances mean that there must be a lapse of two years from the date an individual ceases to hold office as a director in accordance with the provisions of the relevant corporate legislation would in some instances, such as those under consideration, render the limitation period devoid of meaningful substance. What could the appellants do qua director in relation to Olympic's default after the receiver-manager was appointed? Nothing. As of that date their power in that capacity ceased by operation of section 110 of the Company Act. They were also then stripped of their powers as officers of Olympic under that section. It is clear from Mr. Drennan's evidence that after the appointment of Thorne Riddell Inc. as receiver-manager the role of the appellants respecting the hotel business was reduced to that of its employees under Drennan's direction.

Section 110 of the Company Act* referred to above is noted earlier in the same judgment on page 2072 (D.T.C. 723):

Subsection 1(1) and sections 109, 110 and 111 of the Company Act, R.S.B.C. 1979, c. 59, provide:

1. (1) In this Act

“court” means the Supreme Court;

109. Subject to section 122, a person who is licensed as a trustee under the Bankruptcy Act (Canada) may be appointed under an instrument, or any person may be appointed by the court, as a receiver manager of all or any part of the undertaking of a corporation, and, in either case, on being so appointed he may carry on any business of the corporation and have access to its records concerning that part of the undertaking for which he is appointed.

110. Where a receiver manager is appointed, the powers of the directors and officers of the corporation cease with respect to that part of the undertaking for which he is appointed until he is discharged.

111. Every receiver manager appointed by the court is an officer of the court and not of the corporation, and he shall act in accordance with the directions of the court.

However, also in argument, counsel for the respondent provided a copy of another judgment of the Court Tuesday Chan v. M.N.R. (unreported) heard in Calgary, Alberta and dated November 24, 1989 (almost contemporary with Perri, supra) and delivered by Judge A. Brulé. From that judgment counsel quoted:

The first requirement is obvious in this case. The company became bankrupt and therefore Revenue Canada could not claim against it. Here the proceedings were not started within the two year period of the events, but directors continued to be such, although with reduced rights and powers, after the appointment of a trustee, receiver, liquidator or other like person acting in a similar capacity.

It therefore appears to be a matter of opinion whether it can be said "ceased to be a director" (subsection 227.1(4) of the Act), is fulfilled simply by the appointment of a receiver-manager as a result of insolvency or bankruptcy. It may be that some difference can be found in the legislation of the two provinces—in the above two examples British Columbia and Alberta. In the Saskatchewan Act, the similar portion is section 91, and while I do not need to decide the point here, I would have some difficulty reaching the conclusion that the appointment of a receiver-manager under the Saskatchewan Act could be interpreted as synonymous with "ceased to be a director". That question can remain for another day, since in my view neither case has direct application here—there was not the appointment of a receiver-manager. This instant appeal must be looked at only as the laws of the Province of Saskatchewan interact with the provisions of the Act.

Having said that, I will quote several sections of the relevant Saskatchewan Act which appear to have a bearing in this appeal on the question of "ceased to be a director” (subsection 227.1(4) of the Act).

97.(1) Subject to any unanimous shareholder agreement, the directors of a corporation shall:

(a) exercise the powers of the corporation directly or indirectly through the employees and agents of the corporation; and

(b) direct the management of the business and affairs of the corporation.

103.(1) A director of a corporation ceases to hold office when:

(a) he dies or resigns;

The reference is to the Province of British Columbia.

(b) he is removed in accordance with section 104; or

(c) he becomes disqualified under subsection 100(1).

(2) A resignation of a director becomes effective at the time a written resignation is sent to the corporation, or at the time specified in the resignation, whichever is later.

It appears to me that since Exhibit A-1, supra, the filed copy of a letter dated October 31, 1985 from the appellant to Centaur was referenced by the respondent in this matter to support a conclusion that Mr. Irvine was a director— whether he knew it or not—and I have regarded it as a significant indication of that status, the same letter must be regarded as an indication of his resignation. I have earlier pointed out that the testimony given by Irvine relevant to this exhibit was not very convincing—but the letter is either accepted or it is not, and I have accepted it as evidence. Therefore, it fulfils the requirement under the Saskatchewan Act that a director ceases to hold office—when —he resigns. There is no indication in the Act to where or to what he should or must resign—but I cannot think of a more appropriate place than to the only other director of the company, which is what Exhibit A-1 purports to do.

Summary

Therefore, in my view, the conduct of the appellant in assuming the active role he did in the company, particularly in co-signing the cheques is sufficient evidence for me that the documents filed by the corporation in February, 1985 (Exhibit A-2) denote the position held by Irvine at that time—as a director. That conclusion is confirmed, as I see it, by his own letter (Exhibit A-1) dated October 31, 1985. However, that same letter also serves to satisfy me that as of that date, October 31, 1985, he ceased to be a director.

Accordingly the appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment.

The appellant is entitled to costs.

Appeal allowed.