Jules Maroist v. Minister of National Revenue, [1990] 1 CTC 2521, 90 DTC 1524

Garon, T.C.J.:—This is an appeal from an assessment dated June 11, 1985 made by the respondent pursuant to section 227.1 of the Income Tax Act and section 68.1 of the Unemployment Insurance Act, 19717 [1] In particular, this assessment is based on the fact that the appellant did not act as Director of Les Industries Cadrebec Ltée, hereinafter referred to as "Cadrebec", with the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. The failure referred to by the respondent was the fact that Cadrebec omitted to submit to the Receiver General source deductions made pursuant to the Income Tax Act and the Unemployment Insurance Act, 1971 for a certain period of time in 1982, 1983 and 1984. It was admitted by the parties that this company did not submit the amounts in question to the Receiver General and pay the interest and penalties relating thereto, in accordance with the provisions of these two statutes.

The debate in this appeal concerns whether the appellant was a Director of Cadrebec, and if so, whether he met the requirement contained in subsection 227.1(3) of the Income Tax Act.? [2]

Cadrebec was established pursuant to the Canada Business Corporations Act on May 15, 1981. It operated in the field of manufacturing steel doors and frames for all kinds of buildings.

At the time it was incorporated Cadrebec had only one Director, Mr. Ronald Perks, as appears inter alia from the document titled “Notice of Directors or Notice of Change of Directors” entered in the record of this case. Mr. Perks was also the company's President and Secretary.

The evidence further disclosed that Mr. Perks was in fact responsible for managing Cadrebec's day-to-day operations. It was he, for example, who hired and fired employees, sent orders to suppliers and set sales objectives for the company's products. For much of the relevant period, the company's employees numbered between 25 and 35. Mr. Perks had his office at the company's place of business in Montreal.

So far as the appellant's function in managing the affairs of the company is concerned, he obtained information on its activities by meeting with Mr. Perks from time to time. These meetings were irregular and they might see each other twice in the same week or two or three times in a three-month period. The appellant signed the necessary cheques jointly with Mr. Perks. They sometimes signed blank cheques weeks in advance: neither the amounts nor the names of the persons to whom they were to be paid would be shown. The appellant had no office at Cadrebec's place of business. However, the evidence showed that the appellant signed several documents on behalf of the company as its "Executive Vice-President”. The appellant and Mr. Perks both stated categorically that the appellant’s name did not appear in Cadrebec's books as a Director. This was given as the explanation for why Mr. Ronald Perks was the only one who signed the proposal filed pursuant to the Bankruptcy Act. Not only was the appellant not consulted when [the] decision was made to file this proposal, but in addition he only learned of it after it was done. Mr. Perks told the trustee that he was Cadrebec's only Director. Both Mr. Perks and the appellant himself stated the appellant's function was simply that of an investor. He was never invited to meetings of the board of directors and never tried to call such meetings. He had never seen Cadrebec's financial statements before it went into bankruptcy. The irregularity of the consultations between Mr. Perks and the appellant and the appellant's reliance on Mr. Perks, specifically regarding the signature of cheques, is easily understood. First, they had been friends for a long time. Then, for a good part of this period at least, the appellant was President of the Association des propriétaires des meubles du Québec and was completely occupied by his duties with that organization. The appellant even said that he worked up to 18 hours a day. He was also concerned in the affairs of another company controlled by him, Entreprises Ju-An Inc., which had its head office in Québec, but he admitted that he devoted very little of his time to the activities of this latter business.

The evidence further showed that before Cadrebec went into bankruptcy, the appellant in his discussions with Mr. Ronald Perks was concerned primarily with sales, and especially with the company's production and sales objectives. Except for one occasion, he did not pay any particular attention to the state of source deductions payments to governments.

It should be mentioned that another corporation was created under the Canada Business Corporations Act on October 27, 1982. This was Cadrebec International Inc. At the time of its incorporation the latter company had two Directors, the appellant and Mr. Ronald Perks, who it will be remembered was originally Cadrebec's sole Director. Except for the foregoing, Cadrebec International Inc. had no other employees. This company was to handle international contracts and the role played by Cadrebec was to complement that of Cadrebec International Inc. The appellant knew some contractors who were doing business abroad and Cadrebec International Inc. thus came close to obtaining a contract for a sum of over a million dollars. This contract was to be performed in Algeria. In actual fact, Cadrebec International Inc. was never active.

The appellant's financial interests in Cadrebec when it was created by Mr. Perks were substantial. The appellant testified that on two occasions he invested $25,000 in this company. Subsequently, the appellant and a company controlled by him, Entreprises Ju-An Inc., acted as sureties for Cadrebec's debts up to the sum of $47,000. The appellant also gave this company a loan of $50,000. Apart from the surety, the evidence did not disclose the specific dates of these investments and the other transactions just referred to. According to the trustee's report to Cadrebec's creditors on June 11, 1984, the appellant and Ronald Perks each held 51 ordinary shares at the time the proposal was filed. They were the only two shareholders who held voting shares. At the same time these two persons, members of Mr. Ronald Perks’ family and employees and former employees of Cadrebec held non-voting class B shares.

When this appeal was heard the respondent admitted that the appellant was not a Director of Cadrebec before May 31, 1983. He argued that the appellant was a Director after that date. In support of this, he filed a resolution dated May 31, 1983 as No. 1-1, which reads as follows:

RESOLUTION OF THE SHAREHOLDERS OF “LES INDUSTRIES CADREBEC LTEE/ CADREBEC INDUSTRIES LTD.", effective May 31st, 1983.

INCREASE OF NUMBER OF DIRECTORS

RESOLVED:

"THAT the number of Directors of the Corporation be and is hereby increased from one (1) to two (2)".

APPOINTMENT OF NEW DIRECTOR

RESOLVED:

"THAT Jules Maroist be and is hereby appointed a Director of the Corporation.”

THE FOREGOING RESOLUTIONS ARE HEREBY ADOPTED BY THE SOLE SHAREHOLDERS OF THE CORPORATION ENTITLED TO VOTE THEREON PURSUANT TO THE CANADA BUSINESS CORPORATIONS ACT.

(signature)

RONALD PERKS

(signature)

JULES MAROIST

The wording of this document, entered in evidence at the examination of an employee of the Department of National Revenue, clearly indicates that the appellant was appointed a Director as of May 31, 1983. The appellant and Mr. Perks both acknowledged their signatures. They explained that they had forgotten the adoption of this resolution by the shareholders. The appellant stated that he signed by mistake. The evidence appeared to indicate that the wording of the resolution at issue was prepared by counsel for the Bank of Montreal and that this document was part of a large number of documents apparently signed at the same meeting—which lasted for several hours—held in the offices of the Bank of Montreal. In order to obtain a $200,000 loan and an extension of a $75,000 credit line, Cadrebec, the appellant and Mr. Perks had at that time to sign a number of contracts and other documents. It was at a time when the company was experiencing very serious financial problems.

It was further established that certain bank documents involving the Bank of Montreal were signed by Ronald Perks and the appellant as "Executive Vice- President" of Cadrebec during the period prior to the filing of the proposal with the trustee. They were the following documents: "Agreement as to Loans and Advances and Security therefor", "Application for Credit and Promise to Give Bills of Lading, Warehouse Receipts, or Security under Section 178 of the Bank Act" and "Security under subsection 178(1) of the Bank Act". These three documents issued by the Bank of Montreal are dated August 20, 1983. A fourth document dated June 20, 1983, titled "Trust Deed of Hypothec, Mortgage, Pledge and Charge" was issued by Cadrebec in favour of Royal Trust; in this contract the company was represented by the appellant, who is described as "Executive Vice-President”, and Mr. Perks as President and Secretary. Other documents subsequent to the filing of the proposal under the Bankruptcy Act were signed by the appellant with the notation that he was Cadrebec's "Executive Vice-President".

Certain additional items of evidence were submitted when the hearing of this appeal resumed. On the appellant's behalf, the most significant document was the minutes of a meeting of the Company's Directors held at its head office in Montreal on May 24, 1984. By this resolution of the Board of Directors, the company was authorized to file a proposal under the Bankruptcy Act and the president was authorized to sign the necessary documents. These minutes contain certain notations that are worth considering. Inter alia, the following is stated at the beginning of the minutes:

Present

Ronald A. Perks, Sole Director being a quorum of the Directors of the Company, and being all of the Directors of the Company

For the respondent, the annual report dated August 25, 1983 for the period ending June 30, 1983 was the most important document. This report should be read together with Cadrebec's annual report for the year ending June 30, 1982 and the contemporaneous reports of Cadrebec International Inc. The annual report for the period ending June 30, 1983 indicates that the appellant and Mr. Perks each held 50 per cent of the voting shares and that Mr. Perks was President and Secretary-Treasurer by use of two codes, 07 and 019. In one of the columns on the last page of this annual report, it can also be seen by a line drawn under the heading “Director” that Mr. Perks and the appellant are Directors. This report nowhere indicates that the appellant was "Vice- President", though the code 09 covered this item.

It should be noted that the Director in question in the Canada Business Corporations Act was never told of the change in the composition of Cadrebec's Board of Directors, contrary to the provisions of section 108 of the aforesaid Act, which requires that such a notice in the prescribed form be sent to the Director within 15 days of the change.

The evidence further showed that the company made a proposal under the Bankruptcy Act on May 30, 1984. This proposal was signed by Mr. Ronald Perks only. This proposal was rejected by the creditors and Cadrebec accordingly became bankrupt a few months later. The company was wound up on August 31, 1987 in accordance with section 205 of the Canada Business Corporations Act.

Counsel for the respondent admitted that under sections 227.1 of the Income Tax Act and 68.1 of the Unemployment Insurance Act, 1971, the appellant could not be held responsible for the period preceding May 31, 1983 as to source deductions made but not paid by Cadrebec and interest and penalties unpaid on that date. He thus admitted that the assessment of the respondent should be reduced from $49,584.99 to $34,788.41.

Analysis

Accordingly, it must be determined in light of these facts whether the appellant was a Director of Cadrebec from May 31, 1983 onwards.

In considering this matter, I am inclined to think that the burden of proof rests with the respondent. The assessment by the Minister of National Revenue on June 11, 1985 was based on the assumption that the appellant had been a Director of Cadrebec since at least May 1982, since according to the evidence in making the assessment at issue amounting to $49,584.89 allowance was made, in particular, for unpaid amounts of income tax deducted at source and interest and penalties relating thereto from May 1, 1982 onwards.

As indicated earlier, the respondent altered his position while this appeal was being held and advanced the proposition that the appellant had not become a Director of Cadrebec until May 31, 1983, that is approximately a year later. In my view, this is a new allegation of fact which is substantially different from the assumption made by the respondent when the assessment was made. The following observations of Cattanach J., then a judge of the Exchequer Court, in M.N.R. v. Pillsbury Holdings Limited, [1965] 1 Ex. C.R. 676; [1964] C.T.C. 294; 64 D.T.C. 5184 at page 302 (D.T.C. 5188), support the conclusion I have come to regarding the shifting of the burden of proof.

The Minister could, of course, as an alternative to relying on the facts he found or assumed in assessing the respondent, have alleged by his Notice of Appeal further or other facts that would support or help in supporting the assessment. If he had alleged such further or other facts, the onus would presumably have been on him to establish them. In any event, the Minister did not choose such alternative in this case and relied on the facts that he had assumed at the time of the assessment.

The statement regarding the burden of proof in the preceding passage, though in the nature of an obiter dictum, has not to my knowledge been questioned by any subsequent decision of the courts and appears to be generally accepted.

In reviewing the evidence, the documentary evidence may first be examined. In this connection, there are two principal documents which show that the appellant was a Director, the resolution of the shareholders on May 31, 1983 (Exhibit I-1) and the annual report for 1983 filed with the inspector general of financial institutions of the Government of Quebec. This annual report was not signed by the appellant, but the signature of Mr. Perks appears on it. I am not inclined to place much importance on the latter document particularly because of its format. An error can easily be made when using tick marks. A reference in such a document seems to me to be less conclusive than one in a document stating in as many words that the appellant was a director, as was the case in the resolution of May 31, 1983 by the Cadrebec shareholders. This latter resolution is unambiguous and, as mentioned earlier, the appellant and Mr. Perks acknowledged their signatures without hesitation.

The evidence is not more specific as to the circumstances surrounding the signature of this resolution. A great many documents were signed at the meeting in the offices of the Bank of Montreal. The signature of these documents was a preliminary to obtaining a $200,000 loan from the Bank of Montreal that would be guaranteed in part by the Government of Quebec. These documents included a trust deed, a commercial pledge contract, certain forms relating to participation in the PME aid program, documents dealing with the credit line, security deeds, mortgages and documents indicating assignments of priority. In his testimony, Mr. Perks used the expression “pile of documents" to describe this copious documentation.

Among the documentary evidence for the appellant is the resolution of May 24, 1984 which states, at the time Cadrebec was authorized to file a proposal under the Bankruptcy Act, that Mr. Perks was the Company's sole Director.

In a letter from the Acting Registrar of this Court, dated October 20, 1989, telling counsel for the parties that the hearing of this appeal would resume, it was indicated that the Court wished counsel to file the Cadrebec board of directors’ resolution of June 13, 1983 expressly mentioned on page 1 of the notarized deed, Exhibit 1-6, titled "Trust Deed of Hypothec, Mortgage, Pledge and Charge". This document was not attached to the notarized contract when it was filed by the respondent. The Court also wanted settlement A, mentioned in this same notarized contract, to be filed if it was attached to the contract at the time the latter was concluded. I was given no valid explanation as to why these two documents were not filed. They should have been filed with the Registry office at the same time as the notarized deed of June 20, 1983. If that had been done, there would have been no problem in obtaining copies of this documentation and counsel for the respondent did not tell me he encountered any problem in this regard. This situation may probably require application of the rule of law established by the courts that the failure of a party to file evidence to which it had access allows a court to assume that the evidence was unfavourable to that party. See the decision of the Supreme Court of Canada in Levesque et al. v. Comeau et al., [1970] S.C.R. 1010, at 1012, and the comments of Sopinka and Lederman in their volume The Law of Evidence in Civil Cases, at pp. 535 to 537. It is true that the appellant might also have been able to have access to this evidence, since in all probability the documents were registered, but in my view the respondent had a greater obligation since it was he who entered the notarized deed in question in evidence. Further, the Court's request to file these documents was made in the circumstances to the respondent.

If we look at the testimony, we have the categorical statement by Mr. Perks that the appellant was not a Director of Cadrebec at any time, which essentially corroborates the appellant's version. In his testimony given on August 17 and November 29, 1989, Mr. Perks seemed to me to be a reliable, honest and credible witness. I observed him on those two occasions and I am prepared to accept his version of the facts. There was no evidence that at the present time Mr. Perks had any other connection with the appellant than that of friendship.

I therefore conclude that the resolution of May 31, 1983 was signed by mistake. The appellant certainly demonstrated negligence in not understanding the nature and scope of the resolution of May 31, 1983 when he signed that document and in not taking the existence of that resolution into account subsequently. However, I consider that on the evidence as a whole a reasonably prudent person in comparable circumstances could have been the victim of such a mistake. In fact, Mr. Perks himself demonstrated the same negligence by subsequently acting as if the May 31, 1983 resolution bearing his signature did not exist. In particular, it is not inconceivable that a reasonably prudent person could have inadvertently signed a document such as the May 31, 1983 resolution, taking into account in particular the large number of documents signed on that day, the number of people present at the meeting and the inevitable tension accompanying the conclusion of such arrangements which could be essential to the survival of Cadrebec.

It is possible that the appellant became a Director of Cadrebec in law, as regards third parties, despite certain irregularities which may have accompanied the resolution of May 31, 1983 by the Cadrebec shareholders. I am thinking, first, of subsection 101(3) of the Canada Business Corporations Act which provides in principle that appointments of Directors should be made at an annual meeting, and second, the failure to inform the Director under section 108 of that same Act.

Assuming that the appellant was a Director of Cadrebec in law, I consider that he acted in good faith in thinking that he was not a Director and that, as I sought to show above, a reasonably prudent person could have made the same mistake in comparable circumstances. It can be seen from reading subsection 227.1(3) that the standard to be applied concerns only actions to be taken or provisions that must be made by a Director to prevent the failure to deduct, withhold or pay certain amounts, covered by subsection 227.1(1). However, I do not think it is illogical to use this same standard of care, diligence or skill to determine whether a director is at fault in misunderstanding whether he is a director. There is no rule of law of which I am aware that requires a higher standard. The standard in subsection 227.1(3) seems to me to be similar to the concept of the prudent man in Quebec civil law. Paragraph 122(1)(b) of the Canada Business Corporations Act confirms the validity of this point of view. Accordingly, I do not think that the appellant can be blamed for not making the necessary provision to ensure the payment of source deductions.

This approach was adopted in essence by the Associate Chief Judge of this Court, D.H. Christie, in Denis John Cybulskiv. M.N.R., [1988] 2 C.T.C. 2180; 88 D.T.C. 1531, which is now pending before the Trial Division of the Federal Court of Canada. The following comments at page 2185 (D.T.C. 1535) are of particular interest.

In my opinion the general principle that ignorance of the law is no excuse can have no application here. In enacting subsection 227.1(3) Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners. 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 secretarytreasurer 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.

In the instant case we have a situation which is somewhat different from that at issue in Cybulski. In the instant case the appellant believed in good faith that he had not become a Director whereas he could have been, while in Cybulski the taxpayer was justified in believing he had ceased to be a Director even though in law he continued to be. This divergence in the facts is not such as to justify the application of a different rule in assessing the appellant's conduct.

I therefore conclude that the Minister's assessment is incorrect. The appeal is allowed with costs and the assessment is set aside.

Appeal allowed.