Allan Vidler v. Minister of National Revenue, [1990] 2 CTC 2672, 91 DTC 178

Sobier, T.C.J.:—This is an appeal by the appellant, Allan Vidler, against an assessment, notice of which was dated October 24, 1988, under which the appellant was assessed by the Minister of National Revenue 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"). He was assessed as a director of Emerond Manufacturing Ltd. (the "corporation") for $6,685.35 being the balance of unpaid employee source deductions, penalties and interest payable by the corporation under the Act with respect to the months of March, April, May and June 1987.

The appellant was a director of the corporation from October 1, 1984 to February 1, 1986 and again from March 24, 1986 to July 31, 1987. By way of explanation, for the brief time he was not a director, the appellant stated that after Mr. Thomas Pennefather ("Pennefather") acquired 50 per cent of the shares of the corporation, the appellant was asked to step out and was brought back later as a director.

The appellant is an estimator and welder and the corporation manufactured and sold propane tanks, steel work and pressure vessels. Mrs. Doreen Vidler, the appellant's wife, performed some office work and bookkeeping and the corporation's accountant was Mr. B. R. Jeske of Jeske & Company Accounting Inc. Pennefather apparently was in charge of the office end of the business.

The evidence made it clear that Mr. Vidler was not very proficient with paperwork and that his job was in the shop.

Prior to Pennefather becoming an officer, director and shareholder of the corporation in March 1986, the appellant stated that there was a system in place dealing with the employee remittances. At the end of each month, Mrs. Vidler would send Mr. Jeske the relevant papers; Mr. Jeske would advise as to the amount of employee remittances to be paid and a cheque was forwarded to Revenue Canada in the appropriate amount. There was no indication that there was a history of failure to remit using this system.

In September 1986, Pennefather retained Mrs. Julia Remenaka as accountant. Mrs. Remenaka's duties included converting the bookkeeping system from a computer system to a manual system, training Mrs. Vidler in the new system and performing accounting services. Mrs. Remenaka was employed until the corporation's bankruptcy on November 20, 1987. There was no evidence of any system of remitting employee deductions between March 1986 and the bankruptcy.

There was a fire in the corporation's premises in December 1986 and the business was severely curtailed. The corporation moved to new premises in March 1987. During the time between the fire and re-opening in new premises, Mrs. Remenaka stated that she did not have possession of the corporation's books. After March 1987, Mrs. Remenaka worked several days each month at the corporation's office and several days each month at home.

After the fire, Mrs. Vidler took a job as a waitress and did not return full- time when the new premises were opened. She may have done some bookkeeping but this is not clear. In any event, during the period from March to November 1987, Mrs. Remenaka was the person in charge of accounting and bookkeeping.

In 1987, the corporation received a contract from Sanitherm Engineering Ltd. to build part of a project in Alberta and the appellant was required to be on the site commencing April 20, 1987. He was on the site until November 1987, presumably ceasing to work after November 1987 because of the bankruptcy. Under the Sanitherm contract, the corporation manufactured the components for the project in British Columbia and the appellant supervised installation on the site in Alberta.

In response to a question concerning remittances during his absence, Mr. Vidler stated that he left a draftsman, Mr. Mike Charko, to sign cheques. No evidence was given by or on behalf of the appellant of any follow-up with Mr. Charko. The appellant gave evidence that he was unaware that there was financial trouble in the corporation or that remittances were not being made.

The evidence of the appellant about his concern over the financial condition of the corporation was that on at least two occasions in January and February, he asked to see the books. He stated that he asked Mrs. Remenaka but that she informed him that he should see Pennefather. Mrs. Remenaka denies this and her evidence was that she did not have possession of the books between December 1986 and March 1987 and that she was never asked by Mr. Vidler to inspect the books.

Mrs. Remenaka's evidence was that Pennefather never instructed her to deny Mr. Vidler access to the books and if she would have been asked, she would have given him access because she said that Mr. Vidler was just as much her employer as Pennefather. Mrs. Remenaka also gave evidence that Mr. Jeske never mentioned to her that there was any impropriety in the bookkeeping. However, Mr. Vidler stated that Mr. Jeske was telephoned by Mrs. Remenaka with respect to changing entries in the books.

The appellant stated that he became concerned because of late shipments to the Alberta job site and returned to the plant to enquire as to the reasons for this. He stated that on his return in June and July, he was not permitted free access to the general office or the plant, but that he was required by the order of Pennefather to be escorted by Mr. Glyn, Pennefather or another person. He claims to have been denied access to the books. There was some friction between the two directors.

Mr. Vidler's evidence indicates that he asked two, perhaps three times, to see the books prior to leaving for Alberta and his requests were denied. This evidence further indicates that he made no other inquiries until June and July when he returned to obtain reasons for the delays in shipments to Alberta. The appellant also stated that during the time he visited, he instructed Mr. Jeske to examine the books but Mr. Jeske was unsuccessful. He told Mr. Vidler that Pennefather would not co-operate.

After he left for Alberta, the appellant believed that Pennefather would make an offer for his shares and Mr. Vidler stated that an offer was made about six weeks later, probably in early June 1987.

An agreement was entered into among the appellant, Pennefather and the corporation dated July 31, 1987 whereby among other things, the corporation agreed to purchase Mr. Vidler's shares. The date of closing was not indicated but it was probably effective on July 31, 1987 since that is the date he ceased to be a director. When the corporation went into bankruptcy on November 20, 1987, Mr. Vidler stated that he was shocked. He gave evidence that during the sell-out negotiations, he had no idea of the financial condition of the corporation. This seems to be contradicted by the evidence that he was worried about the corporation and that was why he asked to see the books again in June and July 1987. He stated that he was not permitted to see the books during the buyout negotiations.

Mr. Vidler was appointed an inspector of the estate of the bankrupt corporation and in the minutes of a meeting of the inspectors, it was indicated by the Trustee that the corporation made a preferential payment to a corporation and Pennefather's father totalling $76,100 but that the Trustee had no funds to pursue the matter.

Attached to the notice of objection was a letter dated March 8,1987 from the appellant to Revenue Canada wherein, among other things, he complained of his treatment by Pennefather. It was pointed out in cross-examination that the letter was probably dated March 8, 1988 since it referred to events which took place after March 1987. The letter was written in response to a letter from Revenue Canada indicating that it were contemplating an assessment under section 227.1 of the Act.

There was little evidence as to the financial condition of the corporation either before or during the time of the failure to remit.

The issue is clear: whether Mr. Vidler is liable pursuant to subsection 227.1(1), and unless Mr. Vidler can bring himself within the saving provisions of subsection 227.1(3), he will be liable.

Section 227.1 imposes the liability on the director if the corporation has failed to deduct, withhold and remit the employee source deductions. With nothing more, the director is liable if there is such failure. He can only escape liability if he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances (subsection 227.1(3)). The period of time during which the exercise of this care, diligence and skill was to have taken place is between March and June 1987. Evidence of due diligence prior to this time might be of assistance if hewere unable to fulfil his responsibilities during those months because of other circumstances. The only month which any action took place, i.e. requesting to see the books was June 1987 at which time the appellant was also negotiating the sale of his shares and looking into late deliveries to Alberta.

The appellant would ask or claim to ask for the books of the company and when the request was refused, he did nothing more. He owned 50 per cent of the shares of the corporation and he was a director. He was not a minority shareholder under the thumb of a majority shareholder. He had every reason to demand his rights as a director and yet he did nothing more than ask.

At certain times, the appellant would claim that he did not know of any problems yet he attempted to convince the Court that he was acting with due diligence by demanding to see the books because he was suspicious. These positions are contradictory. He cannot state he knew of nothing because he stated repeatedly that he suspected something was wrong but did not followup to discover what that something was. A prudent person with suspicions would not only ask to see the books, especially after having been denied access previously, but would take action. As noted, Mr. Vidler's evidence is at times contradictory and he has the benefit of hindsight.

Also contradictory is his claim that he was warned by Mr. Jeske in January and February 1987 that there might be some irregularities and that this prompted him to request to see the books. However, Mr. Jeske's undated "To Whom it May Concern" letter indicates that his relationship with the corporation ended after preparing the August 31, 1986 management statement.

It is no defence that he relied on others to take care of the office work and handle the remittances. Counsel for the appellant referred to Robitaille v. Canada, [1990] 1 C.T.C. 121; 90 D.T.C. 6059 (F.C.T.D.). That decision is distinguishable in that the plaintiff, Mrs. Robitaille, had virtually no involvement with the business of the corporation. She in fact worked for another company controlled by her husband and her brother-in-law. In this instance, the appellant was involved with the business; however, he chose not to become involved with the paperwork since he was lacking skills in this area.

Counsel referred to the reasons of Mr. Justice Addy at page 126 (D.T.C. 6063) where he stated:

The term “diligence”, which is now codified; provides a higher objective standard than that imposed by the common law on directors generally. Although the test is to a large extent an objective one, the question remains, however, what a reasonably prudent person would do in the circumstances in which a director finds himself. These circumstances include subjective elements such as, degree of education, business knowledge and generalability of the director.

The appellant was apparently aware of his obligations to remit prior to Pennefatner's involvement with the corporation, since he noted that there was a system in place. He made no significant efforts to find out what was going on after Pennefather became involved.

Counsel for the appellant also referred to Cybulski v. M.N.R., [1988] 2 C.T.C. 2180; 88 D.T.C. 1531 to support his proposition that the appellant was barred from exercising influence on management. However, in Cybulski, as a result of bad feelings between the two directors, the appellant was found to have unsuccessfully attempted to resign as a director on May 1, 1984, after which time he played no role in the company's affairs. Failure to remit occurred after that date, i.e. September, October and November 1985. Here the appellant was acknowledged to have been a director during the period in question and was involved in the corporation's affairs.

The Court finds that Mr. Vidler did not exercise even a minimum amount of care, diligence and skill in preventing the failure to remit, let alone the degree of care, diligence and skill a reasonably prudent person would have exercised in comparable circumstances. He has failed to discharge the onus required of him under section 227.1 of the Income Tax Act; therefore, the appeal is dismissed.

Appeal dismissed.