Bernard Tremblay, Mario Tremblay and Jean-Yves Turmel v. Minister of National Revenue, [1990] 2 CTC 2666

Lamarre Proulx, T.C.J.:— These appeals were heard on common evidence. They concern assessments issued by the respondent under section 227.1 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), which deals with the liability of the directors of a corporation that has failed to deduct and remit the prescribed amounts to be held on account of the tax payable by its employees.

The arguments of the parties were submitted in writing. In his preliminary argument, counsel for the appellants stated that section 227.1 of the Act is a penal provision that must be interpreted in a restrictive manner, and further argued, citing subsection 163(3) of the Act, [1] that the burden of proof applicable to section 227.1 of the Act is also changed: the respondent has the burden of establishing the facts which gave rise to the assessment and compliance with the conditions associated with application of section 227.1 of the Act.

He referred the Court to a statement by Cattanach, T.C.J. in Cyrus C. Udell v. M.N.R., [1969] C.T.C. 704 at 710; 70 D.T.C. 6019 at 6025, to the effect that subsection 56(2) (now subsection 163(2)) of the Act is a penal provision. As pointed out by counsel for the respondent, the recent decision of the British Columbia Court of Appeal in Lavers v. Minister of Finance of B.C., [1990] 1 C.T.C. 265; 90 D.T.C. 6017 questions the assertion that subsection 163(2) is a penal provision.

I believe it is clear, however, that the quote from Cattanach, T.C.J. refers to a provision of the Act that is completely different from section 227.1. In my view, section 227.1 of the Act sets out a statutory civil liability pertaining to the directors of a corporation that has failed to remit to the Receiver General for Canada the amounts that are supposed to be withheld as tax from employees' wages. I do not see any difference in the civil nature of this provision and the liability provisions of the Civil Code or those of corporate law. I cannot, therefore, accept the preliminary argument by counsel for the appellants and see no reason that would permit me to go against the decision of the Supreme Court in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182 as it relates to the burden of proof in matters of income tax.

Counsel for the appellants raised subsection 227.1(3) of the Act as a second defence:

A director is not liable for a failure under subsection (1) where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

Facts

The appellants were directors in a corporation known as Placo-Coustique Inc. (the "corporation"). According to a notice of assessment sent on January 18, 1988, each of the appellants was assessed $105,866.14, broken down as follows: $83,954.90 in tax; $3,121.62 in unemployment insurance; $8,883.71 in penalties; and $9,905.91 in interest. The failure to remit the tax and unemployment insurance deductions occurred over an extended period. An amount of $56,407.89 had not been paid for 1984, and unpaid amounts for March, April, May and June 1985 totalled $30,668.83.

The company was "[Translation] a type of subcontractor engaged in the installation of drywall, metal studs, suspended ceilings, soundproofing and insulation” (Jean-Yves Turmel, cross-examination, transcript, pages 17 and 18). The three appellants had very separate roles in the corporation. Mr. Turmel, an interior systems installation technician, was responsible for supervising jobs. Mario Tremblay prepared bids and was also able to supervise some jobs. Bernard Tremblay was the general manager of the corporation.

Mr. Turmel described his duties as follows: "[Translation] . . .supervising work sites, overseeing employees' work and returning materials as required. In other words, planning work sites.” (Jean-Yves Turmel, examination, transcript, page 3.)

Mr. Turmel stated that he was told the corporation was having difficulties in March 1985. In December 1984, he learned that there were delays in paying creditors, but he did not know the exact nature of the delays. He collected his own salary until June 1985. He is currently working in the same field as during the period in dispute. He is employed as a "supervisor".

Mario Tremblay described his duties within the corporation as follows (Mario Tremblay, examination, transcript, pages 4-6):

[Translation]

Q. What were your duties within Placo Coustique?

A. I prepared estimates from plans, determined quantities from plans and I also . . . prepared bids with help from Bernard Tremblay and Jean-Yves, and then I was also responsible for managing some projects because there were several projects. . .labour, not much, but especially the materials needed to do the work or correspondence with the general contractor when we were acting as subcontractors or the project owner.

Q. When you refer to project management, do you mean management in the sense of working on files and contracts, or were you also involved in company administration, the financial aspects, accounting?

A. I was mostly responsible for contracts and making sure the job was done right, a job to be done with the men, the materials, everything on site.

Q. And did you hope that the administrative aspect would take care of itself, or .?

A. Well . . .

Q. Why did you not handle it?

A. Well, Bernard was responsible for that, handled the administration, with the help of a secretary who did the accounting, billings, things like that.

He gave his brother free rein in handling the administrative affairs. He first learned of the difficulties the corporation was having around December 1984. He was employed by the corporation until mid-April 1985.

In December 1984, he was told that there was a problem with source deductions. The following testimony pertains to his efforts to correct the failure to remit deduction from employees' wages to the Receiver General for Canada (Mario Tremblay, cross-examination, transcript, pages 48-50 and 67):

Q. From there, what steps did you yourself take regarding the source deductions to ensure that the problem would be corrected?

A. I asked Bernard what he planned to do. Bernard was almost as worried about it. He said, "We'll make arrangements to pay and settle it.”

Q. So your brother said, "We'll make arrangements," that he was going to do what had to be done?

A. Do everything we could . . .

Q. And as for you . . .

A. Well, I’m not the one who handles the papers.

Q. You didn't take the matter any further?

A. Well, I stayed on after, after that January, February, it was really, it was really, it was not going well, so I asked him if he had paid up, checked things. He told me we would take care of it and that he would do everything he could.

Q. Did you look into the matter?

A. Yes

Q. But you yourself didn't take any specific action.

A. Me personally?

Q. Correct.

A. To go see the accountants or anything?

Q. Or go see them and say, “Listen we're going to go to the bank and see what can be done, we're going to notify officials at the Department of Revenue, we're going to consult with outside accounting firms,” did you do anything of that sort?

A. Well, Bernard was taking care of that.

Q. But you yourself did nothing?

A. Well, I was behind Bernard.

Q. You trusted Bernard?

A. Yes

Q. And that is it, you did nothing else?

A. Well, I trusted him, I kept on top of things the whole time.

Q. But you did nothing positive?

A. Specifically, myself, no, because Bernard was already working on it, was taking that route, and going with it.

Q. And you learned later, in March, April, May and June, that things were simply getting worse?

A. Beginning in March, yes, let's say January, February, I did pressure Bernard to see that it was paid off. That is a fact, but there were other, other accounts payable.

Bernard Tremblay, whose current occupation is "businessman", testified that it was he who was responsible for the financial administration of the corporation. He was aware of the delays in remitting source deductions for 1984. His testimony was evasive regarding the months in 1984 for which remittances had not been made. According to the tables of amounts withheld on account of employees' tax, the remittances began to fall in July 1984. The outstanding remittances cannot, therefore, be traced only to November and December as the witness seemed to want to suggest not on the basis of specific evidence, but rather "to his recollection”. With respect to the remittances not made for the months of March, April, May and June 1985, the evidence is very clear that this was a plan proposed by a financial adviser under which only the most important suppliers and creditors would be paid so that current projects could be completed accounts receivable would be due or "enhanced". Under this arrangement, the bank was repaid in full. Bernard Tremblay accepted and followed the plan. In February 1985, a decision was made to stop bidding on work. The corporation would simply complete the jobs it already had.

Unlike in corporate law, where liability with respect to employees' wages is not based on negligence, [2] the liability under section 227.1 of the Act is in my view based on the presumed negligence of the director. This negligence is reflected in the failure to exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. To rid himself of such liability, the director must prove that there was no negligence on his part. He must demonstrate that in all likelihood, a reasonably prudent director acting in comparable circumstances would have handled the payments in question in the same manner.

These criteria, like the criteria normally applied to negligence related to tort liability, therefore dictate that the person in question is compared with another reasonably prudent person from the same background, with the same skills and knowledge, and performing the same duties within the corporation and the board of directors. [3] The Court is then comparing the conduct of the person in question with the conduct of the model and must determine whether the conduct of the model would probably have been different.

Since under section 227.1 of the Act it is not a question of paying damages, the Court cannot prorate the payment to the negligence of the director as it can in matters involving tort liability. There is also in corporate law an assumption that a director in attendance at a board meeting is deemed to have approved any resolution or taken part in any measure adopted during that meeting. I believe that subsection 227.1(3) of the Act bars this presumption. Each of the appellants has the right to provethat the failure is not his fault.

Regarding the criteria for negligence, how do I view the conduct of each of the appellants?

Jean-Yves Turmel's testimony, corroborated by that of the two other directors, leads me to believe that a reasonably prudent person from the same background (previous work, training, current work) would not necessarily have acted differently. Mr. Turmel is an interior systems technician; that is the work he has always done, the work he performed in his duties with the corporation and the work he is doing at present. He was never an employer, but an employee. The role which he was given by the board of directors and which he was able to carry out was to supervise job sites and give his opinion on work methods, work planning and materials to be ordered. I do not believe that he can be considered negligent in the failure to remit source deductions.

I am of the opinion, albeit with a little more trepidation than in the case of Jean-Yves Turmel, that Mario Tremblay exercised the diligence the circumstances allowed him to exercise. Mr. Tremblay was also a tradesman; he had worked for his father's company as a labourer and then became qualified as an installer of interior systems. When he worked for his father, he was never involved in running the business, but he had begun doing job estimates. At the time, he was finishing a diploma in industrial design and working part-time for other drywall installation companies. His work within the corporation was as an estimator. He was more aware than Mr. Turmel of the corporation's financial difficulties, but was not apprised of them until December 1984. He said during his testimony that he nonetheless recommended to his brother Bernard that he pay the amounts due the respondent. It was not he but Bernard and their father, Gilles, who met the financial adviser. Mario does not seem to have been involved in developing or officially approving the financial plan. I believe that in the circumstances, Mario Tremblay did all that he could do; he was relatively young, after all; he had no experience as an employer; and his position within the organization gave him little authority to act. He was never involved in financial management, the corporation's bookkeeping, payroll or writing cheques. He left those matters to his brother whom he trusted and who he urged on several occasions to see that the source deductions were paid.

Counsel for the appellants stated that Bernard Tremblay, "[Translation] when he realized that the situation was beyond him, knew to seek the advice and assistance of a professional whom he should have been able to trust.” Bernard Tremblay did in fact follow the plan prepared by someone who presented himself as a professional manager. Bernard Tremblay knew, however, that he had an obligation to remit the source deductions to the Receiver General for Canada, that he was not living up to that obligation and that he had accepted a plan that perpetuated the failure to remit deductions by paying only some suppliers and paying employees only their gross wages. I cannot conclude that Bernard Tremblay acted like a prudent man would have acted in comparable circumstances to ensure that the aforementioned obligation was met.

Mr. Tremblay agreed over an extended period to not pay the full amount due the Receiver General. This constitutes a wilful and prolonged failure that is inconsistent with the required degree of care, diligence and skill that a prudent director must exercise in order to prevent failure of the type referred to in subsection 227.1(1) of the Act. This was a deliberate choice with the concomitant liability (see Réjean Deschênes v. M.N.R., [1990] 1 C.T.C. 2394; 90 D.T.C. 1339 at 2397 (D.T.C. 1342).).

As a third defence, counsel for the appellants raised the respondent's slowness in identifying the appellant's failure to remit the deductions and in assessing him. Because of this, the appellant continued to do what he had been doing and felt he was no longer able to exercise the subrogation rights referred to in subsection 227.1(6) of the Act, since the assessment, while within the deadline prescribed in the Act, was issued very close to that deadline. I must say in response to this that I see nothing in the Act that would enable me to conclude that the liability of directors under subsection 227.1(1) of the Act is conditional on the speed with which officials of the respondent act, desirable though that might be. As to the assessment deadline, the very fact that the point was raised shows that it is without legal basis, since the assessment was done within the deadline prescribed by the Act. I therefore cannot accept these arguments.

The jurisdiction of this Court, which counsel for the respondent raised in connection with assessments relating to the non-payment of unemployment insurance deductions, is determined in the same manner as in my decision in Lorraine Routhier v. M.N.R., [1990] 1 C.T.C. 2283; 90 D.T.C. 1193, that is, that this Court lacks jurisdiction to hear appeals from such assessments. Such assessments are made under the Unemployment Insurance Act, 1971, R.S.C. 1985, c. U-1, s. 54, and the appeal procedures are regulated under that Act and not the Income Tax Act.

The appeals of Mr. Turmel and Mario Tremblay are allowed, with costs, and the matter referred to the respondent for further review and reassessment. The appeal of Bernard Tremblay is dismissed.

The costs awarded shall apply to the appeals of Mr. Turmel and Mario Tremblay.

Appeals of Mario Tremblay and Jean-Yves Turmel allowed in part.

Appeal of Bernard Tremblay dismissed.