Donald Warner v. Minister of National Revenue, [1990] 2 CTC 2575, [1991] DTC 87

Taylor, T.C.J.: —This is an appeal heard in Regina, Saskatchewan, on September 24, 1990, against an assessment dated October 20, 1989, 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 above assessment also includes amounts with reference to the Saskatchewan Income Tax Act, Canada Pension Plan and the Unemployment Insurance Act, but the only matter at issue in this appeal is that part of the assessment dealing with employees' income tax deductions covered by section 153 of the Income Tax Act.

The notice of appeal read as follows:

Mr. Warner does now and has for some time been an employee of the Town of Balcarres in the position of Town Administrator. The terms of his employment with the Town are that he will act also as an “Economic Development Officer” for the community and he has been very active in promoting the community and working to attract various businesses to Balcarres and area over the past number of years. Mr. Warner was one of several individuals who was instrumental in negotiating with Mr. Lee Eskdale, the principal shareholder in PTL Benson Trailers Ltd. in order to convince that company to relocate its trailer building operation from Saskatoon to Balcarres. In order to assist with the financing of the relocation in Balcarres and the construction of a manufacturing plant there, a Venture Capital Corporation under the name of Balcarres Community Development Corporation was incorporated pursuant to the provisions of the Venture Capital Corporation Act of Saskatchewan. That Corporation then purchased voting shares in PTL Benson Trailers Ltd.

One of the requirements of the Venture Capital Corporation Office, which is a division of Saskatchewan Tourism and Small Business, was that the Community Development Corporation have a Unanimous Shareholders Agreement with Lee Eskdale who was the majority shareholder providing that a representative of the Balcarres Community Development Corporation (BCDC) be guaranteed a place on the Board of Directors of PTL Benson Trailers Ltd. (the company). A similar agreement was entered into between Mr. Eskdale and the East Central LEAD Corporation who also assisted with the financing of the company by providing share capital.

In addition to the requirement of Tourism and Small Business, there was another need for such an agreement. In the late winter and early spring of 1987 it became apparent to those directly involved with the BCDC that all was not right with the operations of the company. The capital that had been supplied to the company had been exhausted, production was not nearly at the stage that had been expected, and the company's bank had dishonoured several cheques. Discussions ensued with Mr. Eskdale and, both for the benefit of the company and to protect the interests of the BCDC, it was agreed by all concerned that a representative of the BCDC take a more active role in the operations of the company.

In an attempt to ensure that the company was operating according to sound financial principals and to protect the community's investment in the company, it was decided that a representativeof the BCDC take a more active role in the operations of the company. Mr. Warner was the logical person.

Not only was Don Warner instrumental in the relocation of the company but his sound business background and his position with the Town meant that he could be “loaned” from the Town of Balcarres on a temporary basis to the company for the benefit of all concerned. The Town was obviously interested in keeping the company active, the BCDC wanted to protect its investment, and the company clearly needed someone else to assist with its accounting operations. In other words, it was for the very reason that there was concern about default on the part of the company to its employees and other creditors that Mr. Warner was to become involved. He had no personal stake in the company whatsoever but was a director in a representative capacity only.

The difficulty was that although assurances had been given by Mr. Eskdale that all of the books of the company would be first opened to Mr. Warner for his inspection and then, in fact, turned over to Mr. Warner in order that he could act as the company’s accountant and bookkeeper at least until order was restored, the books of the company were never provided to him. Mr. Warner had asked Mr. Eskdale for those books and access to all of the financial records of the company repeatedly but Mr. Eskdale either was not available or made unfulfilled promises about delivery of the documents or simply neglected to provide the financial records of the company to Mr. Warner.

Because of these factors it is respectfully suggested that this is a perfect situation for the "due diligence” defence to be applied. At the time that he accepted a direct role with the company assurances were given that the company was not in bad financial shape but simply needed a bit more direction. Those representations proved to be false and the records which would have allowed Mr. Warner to assist were never provided to him despite numerous and repeated requests.

Aside from the due diligence defence it is denied that Mr. Warner was ever formally appointed as a director. Shortly after the agreement was reached with respect to the Unanimous Shareholders Agreements, informal discussions took place between Mr. Eskdale and representatives of the BCDC and the East Central LEAD Corporation. These discussions included discussions about who should constitute the new Board of Directors of the company. Mr. Eskdale insisted that an accountant from Saskatoon by the name of Mr. Beatty be associated with the company more directly and sit on the Board of Directors. Mr. Beatty never attended a Board of Directors meeting or that any Board of Directors meeting was ever held with proper notice having been given to him. No Notice of Directors was ever filed with the Corporations Branch. Mr. Eskdale would only consent to the appointment of Don Warner and a representative from the East Central LEAD Corporation on the condition that Mr. Beatty would also sit on the Board of Directors. If Mr. Beatty never accepted that appointment and was never formally appointed to the Board of Directors, then the “conditional appointment" of Mr. Warner was never formalized or made unconditional.

The third difficulty with the position of Revenue Canada in this matter is based on public policy. Surely Revenue Canada and the Saskatchewan Government must have worked together or consulted with each other when the Venture Capital Corporation Program was established. One of the conditions of the BCDC getting Venture Capital Corporation status, and the resulting favourable tax treatment for its shareholders, was that a representative of the BCDC be appointed to the Board of Directors of the company. It seems illogical to that personal liability to Her Majesty should now fall upon a shareholder as the result of his taking a position that he or someone else was required to accept by another level of Her Majesty's Government. The BCDC did not even hold voting shares in the company originally. The BCDC was content to hold non-voting shares and try to monitor the situation. It was because of the requirements of Tourism and Small Business that the nonvoting shares were converted to voting shares and the Shareholders Agreement prepared requiring a seat on the Board of Directors.

The respondent in the reply to notice of appeal detailed the history and record of the dispute:

— At a meeting of the shareholders of PTL Benson Trailers Ltd., held April 30, 1987, the appellant was elected director of the company and continued in that position until the company was struck off the Corporate Registry on December 31, 1987;

— The company was assessed for failure to remit source deductions pursuant to the provisions of subsection 153(1) of the Act on the following dates: June 2, 1987 and August 10, 1987;

— At no time did the company keep the amounts withheld from payments of salary and wages separate and apart from its own moneys;

— The company has failed to remit the assessed amounts;

— At the time of the appellant's appointment as a director of the corporation it was known to the appellant that the company was in financial difficulties ;

— The appellant failed to exercise the degree of care, skill and diligence to prevent the failure of the company to remit the assessed amounts that a reasonably prudent person would have exercised in comparable circumstances;

— The respondent relied, inter alia, upon Sections 153 and 227.1 of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63, s. 1, applicable to the 1987 taxation year of the appellant.

The evidence supplied to the Court attested to the general facts regarding the establishment of PTL Benson Trailers Ltd. ("Benson") in the Town of Balcarres, Saskatchewan, as outlined by the appellant in the notice of appeal, supra. It was clear that Mr. Warner was and is a dedicated, capable, and concerned citizen and official of Balcarres, and that he was interested in this endeavour in a positive way. Whether he was doing so only in his capacity as town administrator, and to what degree he acted under direction from Balcarres, was not made clear at the hearing, but in my view that is a matter for Mr. Warner and the municipality, not for this Court in any event. What is evident, though, by virtue of his forthright and full testimony is that he was appropriately familiar with payroll, deductions, remittances, etc., from his role as a municipal official. It is also painfully clear that this entire venture was and remains a source of great chagrin, even embarrassment to the persons involved and to the entire Town of Balcarres, resulting from a sincere and serious but unsuccessful effort to improve economic conditions there. Whether all the parties to that effort—Benson the company, Mr. Eskdale (from notice of appeal), etc., had in mind the same objective may well be a subject of some dispute and concern, but again that is not a matter for the determination or comment of this Court.

Coming directly to the points covered by the notice of appeal, supra, and argued by counsel for the appellant, I would note that whether there is some complaint regarding the co-operation or coordination which should have existed between "Revenue Canada and the Saskatchewan Government" (last paragraph of notice of appeal) is not for this Court to determine. Turning then to the penultimate paragraph from the notice of appeal and that immediately preceding it—these represent the two major thrusts put forward by counsel — "due diligence was exercised by Mr. Warner" and "he was not a director at all”. In my view, it is difficult not to be struck immediately by the obvious dichotomy between these two assertions, they appear almost mutually exclusive. It is difficult to imagine how any person can, on the one hand argue—"I was not a director", (unless there can be demonstrated a clear legal impediment to him filling that particular position) while on the other hand arguing—"If I was a director, I exercised due diligence”. How anyone could ascertain the parameters and requirements of "due diligence” for a position he did not recognize he occupied, leaves me at a loss. Nevertheless, we shall look at these questions in the light of the legislation and the jurisprudence.

There is no question that Mr. Warner was a director. At an "Extraordinary Meeting of Shareholders" of Benson held at Balcarres on April 30, 1987, not only was he so duly elected, he signed the shareholders' minutes in his capacity as secretary-treasurer. That disposes of one point. The assertions raised by counsel for the appellant in an attempt to neutralize this fact are simply not acceptable.

With regard to the "due diligence” aspect, I would refer to the recent case of this Court, James White v. M.N.R., [1990] 2 C.T.C. 2566 in which a similar situation of a kind of "community service" was examined in connection with an attempt to establish a fish processing plant in the Province of Newfoundland. I quote therefrom from page 2574-75:

The efforts of both Mr. White and Mr. Noel to bring this dream to fruition, together with its objective of local employment and economic stimulation are noteworthy and highly commendable. But the first priority, not the last priority, should have remained the proper remittances of the employees’ funds held in trust in the coffers of the company. In effect, during the period relevant to this appeal, these funds were used for the other operational requirements of the company, as an alternative to the infusion of additional required capital either from Mr. Noel or from the bank. I am fully aware that such additional capital contributions might not have been possible in the circumstances, but that does not provide authority without censure, for the directors of the company to continue deductions and reallocate these deductions for more immediate or pressing purposes—and that is what was done. Such conduct does not give viable conviction or assent to this practice of the misdirection of the unremitted deductions to other uses.

The position of Mr. White in this appeal—aged, retired, not in good health, and living on limited financial resources, gives no comfort to me in reaching this decision. But I am not persuaded that any of these factors can enter legitimately, into a determination of an appeal under subsection 227.1(3) of the Act.

In the instant appeal, it is quite obvious that Mr. Warner became a director at a time when Benson was in serious financial difficulty, and when one of his responsibilities to Balcarres Community Development Corporation, which he represented, was to find out how serious was that situation. His efforts to obtain books, records, documents, etc., from Mr. Eskdale were fraught with difficulty and delay. Nevertheless, he became a signing officer—particularly for payroll cheques—and was responsible for seeing that the employees did receive at least some part of their wages—both current and in arrears, during the period under review as assessed by the respondent. It would also appear that at the time Mr. Warner became more directly involved in the affairs of Benson (above) as a director, the bank credit had been virtually cut off, and that the personal involvement of Mr. Warner may have been the only factor which persuaded the bank to even honour the last few local paycheques. It should be noted that for unpaid deductions prior to that time—in other words prior to Mr. Warner becoming a director—no liability has been assessed to him by the respondent. I do add that as far as the evidence would indicate, Mr. Warner did not profit personally from his efforts (there is no indication he received anything at all), and that he was also a loser as a direct investor. In the end analysis, however, noble as were his efforts to see that some wages were received by the hapless employees, his equal if not more direct responsibility was to see that the deductions which were made were remitted properly. As is so often the case in these situations, the limit of available funds or bank credit could only serve to pay the net amounts of salaries or wages involved, leaving nothing for the deductions made “in trust". Such non-payment of the deductions made from employees wages, serves only to minimize further capital contributions from investors, or reduce bank financial exposure—which does not appear to me to be a situation finding merit in the relief provisions of the Act. Perhaps the only unhappy choices are between not paying the employees at all, or only paying amounts for which related deduction amounts are also within the financial resources of the operation—no matter how limited those resources may be. While making that kind of choice may not be palatable, it does eliminate the route taken in this appeal—to pay the employees, but not pay Revenue Canada.

The appeal is dismissed.

Appeal dismissed.