Douglas B. Clark and Dorothy Claire Clark v. Minister of National Revenue, [1990] 1 CTC 2212, 90 DTC 1094

Taylor, T.C.J.: These are appeals heard on common evidence in Calgary, Alberta, on October 25, 1989, against assessments by the Minister of National Revenue, for the failure to remit deductions withheld from wages paid to employees. At the commencement of the trial, counsel for the respondent noted for the Court that although the assessments at issue covered other amounts, the only matter to be determined by the Court was the liability for the federal portion of the deductions at issue.

Using the notice of appeal for Douglas Clark, I would make reference to:

— The Appellant acted as a Director of Kelsey Exploration Ltd. ("Kelsey") at all material times.*

— Kelsey is a corporation which was resident in Canada at all material times.

— Kelsey paid its employees salaries, wages or other amounts referred to in subsection 153(1) of the Income Tax Act, between July, 1982 and mid-November, 1982 when it was placed in receivership, and withheld therefrom the amounts prescribed under that subsection.

— Cheques to remit funds withheld to the Respondent, pursuant to subsection 153(1) of the Income Tax Act, were prepared by Kelsey in the reasonable expectation that the necessary funds would be available and in the reasonable expectation that the Bank would honour the cheques even if there were insufficient funds.

— The cheques were not released when it became apparent that there would be a shortfall in available funds because the expectations for continued operations

*The Notice of Appeal for Dorothy Clark read:

The Appellant was a Director of Kelsey Exploration Ltd. ("Kelsey") at all material times. However, she was not an active director and left the management of Kelsey to competent management and reasonably relied upon the other director of Kelsey to ensure that proper systems were in place to manage Kelsey.

were unexpectedly not met and that the Bank would not honour the cheques directed to the Respondent.

— The operations of Kelsey halted when it became apparent that the business plan did not succeed and funds were not available to make the remittances and pay other expenses.

— The Appellant submits that he is not liable for the failure of Kelsey to make the required remittances because he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances, as required by subsection 227.1(3) of the Income Tax Act.

For the respondent the situation was:

— The corporation failed to pay the amounts as assessed . . .;

— The corporation was placed into receivership by the Royal Bank of Canada in November of 1982;

— A Certificate was registered in the Federal Court of Canada and execution for the amount of the debt was returned unsatisfied in whole;

— The corporation failed to remit amounts deducted and withheld as employee withholdings as required under the Income Tax Act for the period from July of 1982 up to the time of receivership in November of 1982;

— The directors of the corporation decided not to remit the amounts to the Receiver General for Canada, choosing instead to use the funds to operate the company;

— The Respondent relies, inter alia, upon Sections 153, subsections 227(4), 227(5), 227.1(1) and 227.1(3) 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 taxation year of the Appellant.

— The Respondent submits that he correctly assessed the Appellant under Section 227.1 of the Income Tax Act, as the Appellant was a director of the corporation at the time it failed to remit to the Receiver General for Canada amounts deducted or withheld on account of employee withholdings and the Appellant did not exercise the degree of care, diligence, and skill to prevent the corporation's failure to remit, that a reasonably prudent person would have exercised in comparable circumstances.

Evidence and argument

There was very little presented at the trial which conflicted with the general assumptions of the respondent as far as the material facts of the case were concerned. The essential points were raised by both parties in argument, and I have chosen to make generous reference to the quotations therefrom, since the major dispute rested on the interpretations of the Act.

For the appellant:

As we discussed at the outset this morning, there has been what I submit a significant body of jurisprudence on the subject of assessments against corporate directors developed in the last year. Since your decision, a decision of this Court on July 20th, 1988 on the Moore^ [1] case there have been at least four significant cases that have been reported.

At page 14 of my submission I list them, and in order they are the Cybulski [2] case, a decision of Judge Christie, Associate Chief Justice, I believe. The Edmondson [3] case, a decision of Judge Brulé. The Fancy [4] decision, a decision of Chief Judge Couture. And the Merson [5] decision, a decision for your brother Rip.

As a result of that, I submit that the older cases must be applied with great care in light of this, what I term moderating trend in the recent cases, which I think have gone further in attempting to analyze and find meaning to Section 227.1(3) than has been the case. — in the past.

And I submit that the new cases, particularly Merson and Fancy again establish the proposition of positive action is not necessary. But a reading of Section 227.1(3) doesn't necessarily require something positive. A continuation of what previously existed is acceptable.

The Cybulski case was technically decided on the grounds that the Appellant had resigned as a director in a timely fashion, and hence its value or precedent is not too significant to us.

There is one other thing that is worthy of note and I think the Cybulski case also stands for the proposition that positive action or assertion is not required of a director to fall within 227.1(3) —

The third case that I'd like you to refer to, sir, is in Tab 4, which is the Fancy case.

In deciding for the Appellant taxpayers Chief Judge Couture makes a couple of statements that I think bear repeating in the context of this case . . .

. I on page 2260 (D.T.C. 1644):

“It appears to me that the Appellants did everything that could reasonably be expected of them to meet the requirements of subsection 227.1(3) of the Act.

There is no evidence that the Appellants caused the company to divert any of its funds to their benefit or to the benefit of other creditors to the detriment of the Respondent. They were frugal individuals receiving a modest salary without additional benefits. From July to October 1982 the Appellants made efforts to raise funds and they were hopeful that the bank would support the company as it had in the past, and allow it to meet its obligations under the Act as it did with the August 15 cheque for the employees' deductions. It was only on or about September 10 that the bank refused to honour the payments of the Respondent. My appreciation of all these facts is that the Appellants were victims of circumstances over which they had no effective control.”

My basic submission to you, sir, is that one can't come closer on any of our facts to the Fancy case, that proper application of developing law to our facts, the result should be the same.

Turning to the next case to which I would like to refer you. It’s the Merson case found at, I guess, Tab 5 of my materials. It is simply my submission that (this case is) building on the analytical approach that started with Cybulski, briefly commented upon in Edmondson, and followed and indeed developed in the Fancy case.

The facts are, again, I think similar to the current case to the extent that the company's bankers were de facto, if not in reality, — in the receivership situation. They were in de facto control of the company and specifically required approval by the bank of all cheques issued by the company. The bank only approved cheques necessary to carry on the business, that is essential suppliers.

(At page 2084 (D.T.C. 28 and 29), Judge Rip noted:)

Subsection 227.1(3) does not require that the care, diligence and skill that is expressed with an unduly excessive measure of prudence.

A reliance on systems, on past record, is properly considered in measuring the exercise of care, prudence and skill.

However, when all reasonable measures are taken and these measures have been successful in the past, they may reasonably be expected to rely on the measures in the future.

The company (Kelsey) had a tried and true method of operating, it had worked in the past, and there was a reasonable belief, granted it was wrong, and granted it was risky, but everything is risky, and the fact that something is risky doesn't make it unreasonable. I wouldn't state the case of Mr. Clark any differently, Your Honour. He was not an impassive, uncaring actor. He was actively involved in trying to solve the company's problems. When he learned of the failure to remit there was nothing he could do. The cash was not there. The only thing he could do was to try to find extra financing, which he did. — He could have closed it down or he could have continued operations. And in continuing operations I submit he did the only reasonable thing a person could do. — So we're dealing with a situation that there are notional trust funds there, but that's not what was used. There was nothing used, sir. What was used was money that didn't exist on August 15th, 1982, but came in in dribs and drabs every two, three, four days or whatever, over the next period of time.

(Mrs. Clark) She was living separate and apart from her husband at the time, and to expect her to be in communication is just to ignore the reality of the situation. To say she acted unreasonably would be again to take that ideal picture of a director and put him over there, but not look at the subjective aspect, the real director who is in front of you. I submit to you further that even if she attended the meetings she could not have added anything. She was a nurse who was a homemaker, who had no business experience, no involvement in the past history of the company, — because she wasn't made aware of these circumstances.

Counsel for the respondent:

Here the evidence has been that the company chose to continue operations when they had reached a crunch situation. The credit facilities had been stretched to their limits and the bank was unprepared to extend further credit. In fact, the bank would only permit what have been referred to as essential payments, and the reason why we're here is that wages were not considered to be part of those essential payments.

As I've said, the monies held in trust are amounts which but for the Act would have been paid to the employees as part of their wages, and that raises the question, would the company have considered payment of gross wages to their employees to have been “essential payments"? In my submission, they would not have. On the basis of all the evidence, the whole amounts would have been paid, the evidence of both Mr. Clark and Ms. Cooper is that essential payments were defined as payments required to keep the mine running.

Your Honour, I think it’s important to draw a distinction between a reasonable business decision, — vis-a-vis the director's fiduciary duty to the company and to the shareholders of the company, with that of reasonableness in exercising a degree of care, diligence and skill to prevent the failure to remit the trust funds. This is not the forum to analyze whether or not the decision was sound on a business basis. Here we're only dealing with the reasonableness of the director's actions with respect to the trust funds and the system that was in place in order to ensure that those trust funds were remitted. I would submit to Your Honour that the Quantz [6] and Fraser [7] cases are sufficient authority for the proposition that one cannot simply rely upon other directors to ensure that their obligations under the Act are complied with, or are satisfied.

And if I could briefly refer to the Fancy decision. There the facts are entirely different. An assignment of the receivables had been made some 12 years before, and as a result the Chief Judge found that there was no option available to the Fancy's.

If I might just take a moment to comment on the Merson case. My friend has relied upon that decision as an authority for two propositions. One that there is no absolute standard, and I would agree with that. But clearly the circumstances of each individual case must be looked at to see whether in fact the directors have fulfilled their obligations under the Income Tax Act. And the second point was that one is entitled to rely upon the past on a tried and true system. The system itself does not ensure that the obligations of the directors are met. It's merely an indication of what the directors have done, or have imposed, what sorts of controls they've imposed in order to meet their obligations.

Analysis

While the appeal of Mrs. Clark must not be forgotten in this matter, we will deal first with the points which arose directly connected with the appeal of Mr. Clark.

The thrust of the argument by counsel for the appellant was that Moore, supra, had been overtaken by more recent and enlightened jurisprudence. In fact, according to counsel there were certain aspects to Moore, supra, which had been at least clarified, possibly reversed. One of these was that Moore, supra, implied that a positive action was required with respect to the obligations; another was that the direction taken by Mr. Moore — keeping the company operating as long as possible — should be regarded as having the best chance for success and fulfilling the duty in subsection 227.1(3) of the Act, that ”. . . he exercised the degree of care, diligence and skill to prevent the failure . . .". The other choice — to close down the operations would result in a scenario in which there would likely be no payment to the Receiver General. Finally (somewhat similar in my view to the point immediately above) since the system or procedure in place for withholding and remitting the deductions had worked for several years, and to that extent that "leaving it in place” should be regarded as the most reasonable thing to do, any other possible option being quite unreasonable. Generally, counsel for the appellants relied on the case law in Cybulski, supra, Merson, supra, and Fancy, supra.

I have carefully reviewed Moore, supra, and I am unable to find in it anything which conflicts with the provisions of section 227 of the Act as I read that section. Further I do not read any of Cybulski, Merson, or Fancy, supra, in such a way that would satisfy me they should serve to overturn the major points made in Moore, supra. The appeal of Mr. Moore was obviously decided with direct relationship to the line of cases which had preceded it, some of which were referenced already, and with which I could find little fault in deciding Moore, supra.

Turning to the first point above — the required “positive” action, the words from Cybulski, supra, are (page 2185):

While at first blush subsection 227.1(3) suggests a requirement for positive assertion on the part of a taxpayer in order to bring himself within its ambit, this is not necessarily so in all situations. It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having "exercised" that degree of care, diligence and skill expected of a reasonably prudent person that creates the protection from liability afforded by the subsection. That obtains in respect of this appeal. I am satisfied that reasonable grounds existed for the appellant's belief that he had severed his connection with the Company as director and secretary-treasurer and concomitantly his responsibility for it when he placed his resignation in the hands of the Company's president and it was accepted by him. This relieves him of vicarious liability for the Company's default in remitting the deductions at source and this is so a fortiori where, as here, the appellant was effectively barred from exercising influence over the management of the company by the person in de facto control of its affairs after the resignation was submitted.

To interpret the total of the above quotation as permitting something less than the general level of conduct suggested in Moore, supra, would be incorrect in my view. I read Cybulski, supra, to mean that the appellant therein did not need to do anything "positive" in conformity with the strict words "he exercised the degree of care, diligence and skill to prevent the failure —" since the failure to remit occurred without his involvement and it would appear without even his knowledge. (See page 2182 (D.T.C. 1533)):

Prior to what he believed to have been his resignation on 1 May 1984 the appellant appreciated the importance of remitting deductions at source to Revenue Canada on time. This arose out of his experience with Delmar Paving which was late on a number of occasions in remitting deductions of this kind with consequent onerous additional expenses because of penalties and interest. He spoke to the Company's bookkeeper, Lyne Calvin, from time to time about the significance of this. She was immediately responsible for remitting deductions at source. He said that there had been no failure to remit deductions on time prior to 1 May 1984. He was not cross-examined on this nor was evidence in contradiction introduced. Prior to being assessed the appellant had no knowledge of the Company's failure to remit the deductions that are in issue in this appeal.

[Emphasis added.]

There is no indication in the judgment that Mr. Cybulski resigned as a director (or believed he had done so) in any effort to "prevent the failure" — to remit. And in my view that is the failure to which any such effort must be addressed

— the remittance after deduction had already been completed. In the Cy- buslki, supra, matter the learned judge determined that the appellant was not a director at the critical time and liability should not be attached. I fail to see that such an exception can be generalized in the way asserted by counsel for the appellant in this case, which would negate the effect of the transitive verb "exercise" used in the subsection (in the French language the verb used is "agir"). In my view, to relieve a director from the liability imposed under section 227 might well be the exception, rather than the rule.

With regard to Fancy, supra, I would agree with the comment of the Chief Judge of this Court from page 2259 (D.T.C. 1643):

The provisions of subsection 227.1(3) are clear that the liability of a director of a company under 227.1(1) is contingent upon his personal conduct as a director in relation to the circumstances that gave rise to the omission by the company to withhold or remit the deductions from employees' salaries. Accordingly, previous decisions rendered by this Court are not of great assistance in arriving at a determination of liability in respect to subsequent appeals unless the Court is dealing with comparable facts.

[Emphasis added.]

Also from page 2261 (D.T.C. 1644) I would note:

Counsel for the respondent suggested that when the appellants were aware of the company's serious financial problems around the beginning of August 1982 they should have caused it to cease its operations. By continuing to operate he contended they accepted the risk of becoming personally liable for the company's debt to the respondent under subsection 227.1(1). I cannot subscribe to such a proposition because it does not reflect the true intent of the legislation. The personal liability of directors created by subsection 227.1(1) is not an absolute liability. It is conditional upon their personal conduct in respect of the circumstances linked to the omission by their company to remit the deductions from its employees' salary. The exercise of the care, diligence and skill referred to in subsection 227.1(3) exempts them from that personal liability.

The positive action which I read as a pre-requisite for compliance with subsection 227.1(3) of the Act need not entail the cessation of operations. The continuity of operations is an obvious requirement for the withholding of employees' income tax deductions. But that is neither a requirement for nor assurance of the remittance of such deductions. From Fancy, supra, it would appear that the only amount at issue was that deducted in the month of August 1982 which could not be remitted in September 1982. Taken in conjunction with all the efforts being expended in Fancy, supra, to save the company's operations — attempts to arrange for disposition or auction of equipment, additional financing, etc. — the conduct of the appellant past and current was regarded by the Chief Judge as a reasonable and adequate response by Mr. Fancy to the economic difficulties of the company up to and including the refusal by the Bank to honour the cheque in September 1982 for the one month's deductions as I read the judgment. I see no reason in the judgment to conclude that similar conduct by the appellant including continued operation of the company would have been a sufficient response for periods beyond September 1982. It might simply be an emphasis on wording but in my view, while it could be argued Mr. Fancy even during this one month period ran the risk of being held liable for the deductions, the Chief Judge rejected the proposition that he had accepted the risk of becoming personally liable. That may be a fine line to draw — to continue an operation and suddenly face, almost without warning, the inability of the corporation to remit one month's deductions already made, and conclude that the appropriate level of "prudence" as determined under subsection 227.1(3) had been met; whereas to continue an operation under circumstances which leaves little or no hope of making up that month's default, and runs the risk of additional liability, would fall outside such parameters, and leave the director personally liable. There could well be other perspectives on the directors' conduct, in Fancy, supra, but I am prepared to give serious consideration to the fact that the Chief Judge allowed only the one month, which was all that was at issue.

Continuing the operations and thereby the risks without some special attention to the issue of subsequent deductions may be that to which reference is made in Merson, supra, at page 2083 (D.T.C. 28):

The degree of prudence required by subsection 227.1(3) leaves no room for risk. However, the exercise of care, diligence and skill by a director contemplated by subsection 227.1(3) requires a degree of prudence that is not as great as that of a trustee since a director, it must not be forgotten, is neither the trustee of the fund represented by the unremitted source deductions nor is he the insurer of the Receiver General for Canada. Subsection 227.1(3) does not require the care, diligence and skill that is exercised with an unduly excessive measure of prudence.

With regard to Merson, supra, it is quite evident to me that the learned judge therein did not rely solely on the fact emphasized by counsel for the appellants herein, that "he caused, or allowed to remain, a system to operate within the Company that was tried and tested and had been shown not likely to fail” (page 2085 (D.T.C. 29)). And he found in Merson, supra, that since the situation of Mr. Merson could be distinguished from the case of Mr. Moore in Moore, supra, the required level of prudence had been met. In my view, there is considerable similarity between Moore, supra, and the instant appeal, and the logic from Moore, supra, is more applicable here.

In this appeal, when the really difficult financial circumstances faced this corporation, neither of the director appellants took any identifiable new action to ensure that deductions withheld during the month of July and continuing through November 1982 would be remitted. It was during the last week in July that Mr. Clark met with the corporation's bankers and agreed on what he portrays as "the plan to assist the company to overcome its current financial problems”. The “plan”, in its basic form consisted of an undertaking by the bank to pay only "essential" accounts, to keep the operations going. It is quite clear that “essential” did not include the employees' income tax deductions held in trust, in the opinion of the bank even for deductions made in the month of July. For Mr. Clark, it may have been his hope, perhaps even his conviction that the cheque for the July deductions would be honoured. From then on, these amounts were either not included on the lists of proposed payments prepared for the bank's approval, or the amounts were struck off these lists by the bank as not “essential”, — the bank already having made the point for the July deductions. Mr. Clark would like to argue that the payment of such withheld taxes was out of his hands. I do not agree, and I stand by the comments made on that point in Moore, supra. By excluding, or agreeing to the exclusion of, these trust amounts from the "essential" payments, Mr. Clark did not exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances certainly for the months following the first default. It might well be argued that he had virtually ensured that they would not and could not be remitted. At the same time he made no effort even to pay the employees the full amount of their wages, rather than the net amount, from the months following July 1982, which action might not even have sufficed to relieve him of the “failed to deduct" provision of subsection 227.1(1) of the Act, but it might have provided some defence against the present charge of failure to remit. In my view, for a director to exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances after such amounts have been wihheld, it should be clear that his actions were such as to demonstrate that he, personally, should not be held liable. The methods by which a director faced with that situation can exercise the required degree of “care, diligence and skill” to so relieve himself must be rare indeed. I would note from Moore, supra, at page 2198 (D.T.C. 1542), a corresponding situation: "Instead he left himself at continued risk, and did so as a calculated gamble, which did not pay off.” And again from Merson, supra, (already referenced above): "The degree of prudence required by subsection 227.1(3) leaves no room for risk."

The Act is clear that the withholding and remitting of employees' income tax deductions is a primary obligation of every employer, whether individual or corporate. Where a corporation does not fulfill that obligation, it is equally clear that the corporation (section 227.1 of the Act) remains liable, but as an added caution the directors then become liable also. I can only interpret that subsection to mean that directors are responsible for ensuring that the corporation is properly withholding income taxes and that every reasonable effort must be made both by a corporation and its directors, while deductions are being withheld, that those amounts will be remitted and paid. In terms of "essentiality of payments" it must be clear to directors that such obligations rank considerably higher than the normal operating accounts payable to suppliers, even for such a laudable purpose as maintaining a going business. It is difficult to see how a director by relinquishing his authority over the operations of a company, or having it removed or curtailed by a bank, thereby relieves himself of the liability already imposed on him under section 227 of the Act, unless specific measures are taken to put the bank in the shoes of the director. It is certainly late for even that effort, when the deadline for remittance has passed.

Counsel for the appellants in this matter also argued that the operation of the company and the system for withholding deductions had proven successful in the past, therefore to continue was the most reasonable course of action. I do not agree. The existing system of withholding the deductions but not putting them in a separate fund or account for immediate payment if necessary, but rather paying them out of the funds available by the 15th of the following month had in fact not worked. It had managed in the past to make available by the 15th of the following month the required amount to clear the previous month's liability, but there is absolutely no indication that the funds deducted would have been available for remittance on the first day of the following month or any other day before the 15th of the following month. Certainly the funds were not available when the financial crunch came which has brought about these appeals. Rather than "having worked well for all these years" which is the position adopted by counsel for the appellants, the operation of the company (the system) which he asserts fulfills the responsibilities of subsection 227.1(3) of the Act finally creaked to a halt and broke down during and immediately after the month of July 1982. In my view, the continued existence of the company and its operations had little to do with the obligation to "prevent the failure” — to remit already deducted funds, or to ensure that subsequent deductions would be remitted as required under the Act. It normally did gain the appellants an additional 15 days to make up the funds necessary to send in the deductions each month, but that is all, and to the extent relying on Fancy, supra, I have indicated some consideration could be accorded. Theoretically, at least, if the deducted funds were available to the company — in trust — at the end of a month (and they should be since the expense deduction taken by the corporation included not only the net wages but the gross wages) then even if the company ceased operations at the end of a month — any month — the required dedicated funds would be there for remittance, or available in the case of bankruptcy for the trustees' remittance. In my view the 15 days grace provided under the Act for remittances, is not a mandated period allowed for the purpose of substituting other funds, — from subsequent operations — for those already deducted and withheld. It is a simple administrative period in which to do the necessary calculation and office work entailed in order to correctly remit the deductions. The assertion that by keeping the company in operation, the directors are taking the most reasonable course to ensure that the deductions already in arrears might be remitted, cannot be sustained in my view. Keeping the company in operation might well serve to "deduct or withhold" additional amounts from the paycheques of employees from current operations to the possible detriment of those employees, but I reject the general assertion of any relationship between that continued operation and the required remittance thereof. That differentiation seems apparent by the inclusion of the word "or" in subsection 227.1(1) of the Act —

227.1(1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or sections 153 or 215 or has failed to remit such an amount, the directors . . .

[Emphasis added.]

Therefore, in dealing with Mr. Clark it is my view that the outer limits of fulfilling the requirements of "care, diligence and skill” when reliance is placed on the "system in place" might be extended based on Fancy, supra, to the first month of non-remittance where the circumstances warrant. Even then, corroborative circumstances would be required to support that proposition. With some degree of reservation, I am prepared to allow the appeal of Mr. Clark in order that the assessment may be reduced by the amount of deductions for the month of July 1982 only, withheld and not remitted. To that extent I have been persuaded by the capable argument of counsel for the appellant and his reliance on recent case law.

Turning then to the appeal of Mrs. Clark, this is quite an unfortunate situation. Mrs. Clark during the times relevant to her appeal was separated from Mr. Clark and had virtually no contact with him on matters relating to the corporation. It is quite clear she neither knew nor was informed that the corporation was going through financial difficulties, or that the prospect of non-payment of accounts, particularly the employees' deductions, loomed as a distinct probability. Nevertheless she remained as a director and there is no indication, as it is portrayed in Cybulski, supra, that she did anything to change that responsibility. Her appeal will be dealt with on the same basis as that of Mr. Clark.

Summary

In my view in order for a corporate director to escape the impact of the provisions of subsection 227.1(1) of the Act, he must be able to demonstrate conduct with regard to his responsibilities which permits the narrow exclusion provided under subsection 227.1(3) of the Act. When the problem is failure of the corporation to remit employees' deductions for a month for which they have been already withheld, a director's past conduct to avoid such default, and his current actions to make up that default as well as to ensure against its repetition, may be of a sufficiently positive nature that the liability would remain only with the corporation (subsection 227.1(1) of the Act) rather than resting equally with the director. I am prepared in this matter to accept that the conduct of these directors fulfills the requirements of subsection 227.1(3) to that extent. For a director “jointly and severally”, together with the corporation

— under that section, to obviate that state of affairs with regard to the further withholding of deductions, something greater than merely the continuation of existing corporate operations is required, and something more apparent than merely paying other essential accounts is certainly mandated. I do not see that the interjection of outside financial control of the operations has any beneficial impact on a director's liability, it is a risk of business accepted by any corporation or individual relying on outside support. Again, stretching the provisions of the Act to allow for the first months default (Fancy, supra) is the maximum I can see, and then only when other circumstances support such a concession. It should not be construed that a director has any automatic "one month free” from such liability. I do not read that kind of reprieve in Fancy, supra.

I have read a recent detailed oral judgment of this Court ably delivered by Judge St-Onge, in which he covered the possible range of "risk" to which a director should address his mind — (Bevan McGarry et al. v. M.N.R.). Obviously it was not available for reference at the trial in this matter and therefore I do no more than suggest it for review. It would be made available by the Court for any party interested. I would also make reference to an article in the newsletter — Business and the Law dated October 1989, published by Richard De Boo. I have already indicated that I do not find in this appeal a total set of circumstances similar to those upon which the learned judge in Merson, supra, reached a decision favourable to that appellant. A review of the decision in Merson, supra, in the above publication is entitled "Directors Beware”, and I would quote the concluding portion therefrom:

Finally, Revenue Canada suggests that when directors become aware that the corporation is in financial difficulty, they have special responsibilities in addition to those listed above. Such responsibilities might include obtaining from the appropriate financial institution an enforceable undertaking to pay all the related deductions when due. If such an undertaking is unobtainable, then the directors should establish a separate payroll trust account into which gross payrolls would be deposited for subsequent disbursement to employees with the difference to be remitted to the Crown when due. It is also important that the directors advise the trustee, receiver or liquidator in writing of any special banking arrangements that are in place for the payment of source deductions withheld.

If a director is found liable under this section and makes payments toward this liability, then he or she is entitled (a) to the same preference in liquidation, dissolution or bankruptcy proceedings as would otherwise have been available to the Crown, and (b) to a contribution from all other directors who are liable.

Section 227.1 is a potentially costly pitfall that all directors must avoid through carefully documented periodic monitoring of the corporation's remittance procedures.

Regarding the special nature and responsibilities of the corporate structure, although touching on a different point, the comment in Dramar Investments Limited v. M.N.R., [1978] C.T.C. 2936 at page 2940; 78 D.T.C. 1675 at page 1678 has some application here:

I would point out that while the corporate format for business operations is recognized and acclaimed by investors and businessmen alike for its convenience and advantageous characteristics, its use for such commercial purposes carries with it the distinct obligation for the same parties to understand and accept the restrictions and parameters inherent in the corporate structure, from a taxing perspective.

The appeals are allowed in order that the assessments should be reduced by the amount of the employees' income tax deductions withheld during the month of July 1982. In all other respects the appeals are dismissed. The entire matter is referred back to the respondent for reconsideration and reassessment. Although the success of the appellants was limited, the efforts expended to bring the matter forward warrants consideration with respect to costs. In my view the costs awarded should be set at a total of $1,500, allocated to the appeal of Douglas B. Clark. No costs are awarded with regard to the appeal of Dorothy Clark.

Appeals allowed in part.