Dale Pilling and Heather Pilling v. Minister of National Revenue, [1989] 2 CTC 2037, 89 DTC 327

Rip, T.C.J.: — Dale Pilling and his wife, Heather Pilling, appeal from income tax assessments dated May 2, 1986, in which they were each assessed penalties and interest in the amount of $27,170.68 pursuant to subsection 227.1(1) of the Income Tax Act ("Act"). In 1982 the appellants were directors of Gilmour Construction & Engineering Co. Ltd. ("Gilmour") which failed to remit to the Receiver General for Canada ("Receiver General") amounts of tax deducted from wages or salary paid to employees in 1982. Certificates dated September 29, 1982 and October 5, 1984 were registered in the Federal Court of Canada against Gilmour in respect of outstanding unremitted employee source deductions for 1982 including income tax, penalty and interest.

The appeals were heard on common evidence.

Dale Pilling is a professional engineer, having graduated from the University of Calgary in 1973. In 1974 he and his wife moved to Kelowna, British Columbia. One of his clients in Kelowna was Gilmour who carried on the business of general contractor, building sewer and water systems and roads. In 1977 Mr. Gilmour, who owned the shares of Gilmour, decided to retire and sold the shares of the corporation to Mr. Pilling.

During 1977 to 1982 Gilmour was “always busy” and growing, according to Mr. Pilling. The corporation averaged 30 employees with as many as 40 in 1981, its best year when it grossed $1,500,000 in sales.

Mr. Pilling managed Gilmour. He was in charge of hiring employees, bidding on contracts, supervising jobs, and in general, the entire operations of the corporation.

Mrs. Pilling spent a good part of her time at home attending to the couple's children. However, she did assist with payroll and accounts. When she was at the office she would also answer the telephone and help clean and organize the office. She testified she was not involved in decision making but took directions from her husband.

Each of Mr. and Mrs. Pilling earned identical income from Gilmour.

In the first year after Mr. Pilling acquired the corporation, Gilmour had no line of credit with its banker, the Bank of Montreal. As the corporation grew, arrangements were made for an operating line of credit of $15,000 secured by a second mortgage on the appellants' home. Sometime in August of 1981, the Bank of Montreal proposed an increase in the line of credit to $30,000 on security of the second mortgage and the assignment of book debts which Mr. Pilling had executed and apparently delivered to the bank. Mr. Pilling stated he rejected this proposal but in October of 1981 the Bank of Montreal registered the assignment of book debts. In any event up to the autumn of 1981, Gilmour was performing well and was receiving its accounts on time.

However, during the autumn of 1981, Mr. Pilling explained, real estate prices in the Okanagan Valley of British Columbia plummetted and the good times enjoyed by Gilmour ended. The owner of a forty-lot subdivision, Jeona Holdings Ltd. (“Jeona”), with whom Gilmour had a $250,000 contract for the roads and sewers failed to pay its account for October and November. At the time Jeona informed Mr. Pilling its problems were minor and that payment would be forthcoming. However in mid-December, Jeona said they would not pay, alleging work deficiencies which Gilmour corrected. Gilmour subsequently took legal action against Jeona to collect $64,899.46 from Jeona.

As a result of non-payment of the $64,899.46, Gilmour had a poor cash flow. The corporation had carried on its business with "some working capital”, to use Mr. Pilling’s words, and the $15,000 line of credit. When Jeona did not pay, Gilmour “lost money off the top”, Mr. Pilling said, and he contacted the Bank of Montreal for an increase in its line of credit to $30,000. The bank agreed to the increase but the second mortgage on the Pilling house was increased to $30,000. In early 1982 Mr. Pilling said the corporation was meeting its commitments to the respondent and other creditors.

In the bank's view, according to Mr. Pilling, Gilmour’s operations were in arrears of up to $45,000 to $50,000 “but the bank went along with us”. However, in March 1982 "the bank was no longer happy and wanted us to bear down". The bank refused to honour Gilmour's cheque to the Receiver General dated March 15, 1982 in the amount of $7,050.66 representing the statutory deductions for the preceeding month.

Mr. Pilling explained that the bank wanted Gilmour to operate “as close as possible to the line of credit" and would honour cheques over the operating line of credit only for emergencies, which included fuel for equipment and wages to employees. The bank would not honour cheques to suppliers.

During the spring of 1982, Gilmour had several projects underway; however payments were subject to holdback of 15 per cent which could not be collected until 41 days after completion of the project. Sometime during the spring the corporation had accounts receivable totalling $297,160 of which $64,899.46 was from Jeona and approximately $52,000 from another client on a project referred to as "Eastside". The work on Eastside was being performed for a small utility in a subdivision under construction. The contract price was placed in trust by the utility with a lawyer. When Gilmour issued a final invoice to the lawyer in May, no money was available for payment. According to Mr. Pilling, when the developer of the subdivision had given the lawyer the previous month's statement he advised him it was the final invoice and the money remaining in trust, about $52,000 was released to the developer. Legal action was initiated by Gilmour for recovery of the money but after settlement and payment by Gilmour to subtrades only several thousand dollars was received by Gilmour, Mr. Pilling stated.

The bank then enforced the assignment of book debts and Gilmour's trade accounts were made to the bank. "We lost control,” Mr. Pilling explained. Mr. Pilling complained that Gilmour could not pay its suppliers and as a result was itself being sued. Liens were obtained on its works. Gilmour had no money in its bank account.

In June, Mr. Pilling stated the bank anticipated obtaining money from the Eastside utility subdivision contract and he says he convinced the bank to honour a cheque to the Receiver General for amounts of tax withheld from employees. This was the last cheque payable to the Receiver General which was honoured by the bank.

As a result of the bank's actions, any person owing money to Gilmour "stalled" the making of the payments, according to Mr. Pilling.

During the summer, Gilmour had problems with another contract; a developer began holding back not only 15 per cent of current payments but also deducted from current payments 15 per cent of payments made earlier.

On September 2, 1982, the Bank of Montreal stopped the operating line of credit and took action to satisfy Gilmour's liabilities to it. At the end of October the bank had collected the money owing to it by Gilmour.

Mr. Pilling testified that in 1982 he and his wife each withdrew $9,000 out of the corporation; most of the money was taken out at the beginning of the year.

The payment of wages to employees was described by Mr. Pilling. The employees were paid at month's end. However, at the middle of each month the employees would reserve an advance equal to 40 per cent of "take home pay”. Payment at the end of the month would represent the difference between gross monthly salary less the advance and statutory deductions. Apparently the bank agreed to the employee advances. The statutory deductions withheld from wages would be remitted to the respondent, payable to the Receiver General, on the fifteenth day of the following month. This was the procedure followed consistently for years. Payments to the Receiver General were drawn on the corporation's regular bank account. In cross- examination Mr. Pilling acknowledged the corporation did not pay the February 1981 remittance on time and the cheque for October 1981 was returned because there were insufficient funds in the corporation's bank account. He could not explain the reason for these deficient payments.

Mr. Pilling explained the Receiver General was paid out of the regular accounts receivable of the corporation; as money came in, the corporation would issue a cheque to the Receiver General. When the employees were paid, no money, strictly speaking, was withheld or retained for the Receiver General. Funds for payment came out of amounts received during the first half of the following month.

The Receiver General did not receive remittance for wages paid for the months of March and April 1982 and from June to October 1982. Mr. Pilling said that only employees and creditors requiring cash payments were paid during these periods. The Receiver General was not paid because of the corporation's difficulty in collecting its receivables, Mr. Pilling stated. The corporation could not obtain a further extension to its operating line of credit. The bank allowed Gilmour to write cheques on its account as long as the aggregate of cheques remained below $30,000. Mr. Pilling said the corporation's credit balance rarely was below $30,000. No cheques were written by the corporation payable to the Receiver General during the period of July to October 1982 because Mr. Pilling believed the bank would not honour the cheques; he said he dealt with the bank every day during that time and knew what it would and would not pay.

The corporation ceased operating in November 1982 after the respondent seized the corporation's equipment.

At least one contract commenced by Gilmour was completed by a new company incorporated by Mr. Pilling. For the first two months of this new company's operations, it failed to remit statutory deductions to the Receiver General.

Mrs. Pilling explained how she prepared the payroll. She would calculate the hours and resulting wages and then determine the amount of tax, unemployment insurance premiums and Canada Pension Plan contributions and the mid-month advances. She would verify the amounts with Mr. Pilling and then write cheques to the employees. The cheques were always dated the thirtieth of the month, although she often did not deliver the cheques until the second or third of the following month, once some receivables were paid. On about four occasions she was late remitting cheques to the Receiver General and the corporation was fined. In 1981, "some" remittances to the Receiver General originally were not honoured by the bank since expected receivables were not received when expected. Mr. Pilling would talk to the bank, she said, and the cheques would be honoured.

Under cross-examination Mrs. Pilling admitted that after the Bank of Montreal seized a corporation bank account which consisted of employee deposits toward a dental plan, the corporation opened an account at a local credit union. Some of the corporation's receivables were deposited to the credit union account, obviously without the knowledge of the Bank of Montreal.

Mr. Brian Sutch, a collections officer with the respondent in 1982, also testified. He had various discussions with Mr. Pilling during the late summer and autumn of 1982 to arrange payment of the source deductions. He mentioned that Mr. Pilling advised him that he was attempting to collect the corporation's receivables, even by offering discounts. He also stated that in October, Mr. Pilling informed him he had $30,000 "on hand".

Subsection 227.1(1) of the Act reads as follows:

Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215 or has failed to remit such an amount, the directors of the corporation at the time the corporation was required to deduct or withhold the amount, or remit the amount, are jointly and severally liable, together with the corporation, to pay any amount that the corporation is liable to pay under this Act in respect of that amount, including any interest or penalties related thereto.

The appellants rely on the provisions of subsection 227.1(3) which reads as follows:

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.

Subsection 153(1) provides that:

Every person paying at any time in a taxation year

(a) salary or wages or other remuneration,

shall deduct or withhold therefrom such amount as may be determined in accordance with prescribed rules and shall, at such time as may be prescribed, remit that amount to the Receiver General on account of the payee's tax for the year under this Part.

The appellants rely on the judgment of this Court in Fancy v. M.N.R., [1988] 2 C.T.C. 2256; 88 D.T.C. 1641. Mr. and Mrs. Fancy ran an excavating company in which they were directors and officers. Initially only Mr. Fancy operated the equipment and his wife assumed the duties of bookkeeper, but she was also familiar with most aspects of the business and together they discussed its management. In 1975 an office manager was hired, but Mrs. Fancy kept control over the payroll and the preparing and signing of all cheques. The company ran into financial difficulties in 1981, and in 1982 Mr. Fancy met with the company auditors to discuss what could be done. The auditor informed him that one option was to sell some of the equipment. The auditor also informed him of the personal responsibility and obligations of a director of a company vis-a-vis Revenue Canada for withholding and remitting deductions from employees' salaries. By August 1982 the company's financial problems were such that its bank was monitoring all cheques issued by the company and only authorizing specified payments. The bank refused to authorize the September cheque to Revenue Canada for remittances, so Mrs. Fancy contacted Revenue Canada immediately to notify them of the situation. The Minister filed a certificate for unpaid remittances with the Federal Court and execution was returned unsatisfied. The taxpayers appealed the Minister's invocation of subsection 227(1) and (2) which assessed them as liable for the unremitted funds.

As stated by the Chief Judge in Fancy, at page 2260 (D.T.C. 1643):

. . . previous decisions rendered by this Court are not of great assistance in arriving at a determination of liability in respect ot subsequent appeals unless the Court is dealing with comparable facts.

The facts in the case at bar are not comparable with those in Fancy in several material instances. In Fancy, the company had never been late in making monthly remittances to the respondent. After making the statutory deduction from the payroll, Mrs. Fancy would proceed to the bank and pay these accounts on or before the fifteenth of the following month. When the company got into financial difficulty and the bank refused to approve payment to the respondent, Mrs. Fancy informed the respondent of the situation immediately after being advised to do so by the company's auditors. Mr. and Mrs. Fancy were conscious of the company's obligation under the Act and of their respective personal liability.

In the appeal at bar, the corporation had a history of making late monthly remittances to the respondent. Money remitted to the respondent by Gilmour was not available at the time the wages were paid to the employees; the corporation relied on receivables due the following month for the remittances. When the bank did not honour cheques payable to the Receiver General neither Mr. or Mrs. Pilling notified the respondent so as to offer the respondent an opportunity to protect his interests. Finally, when a new company commenced operations the past history of not remitting the statutory deductions on time continued.

There is no doubt that when the corporation failed to make the remittances in April and May of 1982 and July to October 1982 the bank was monitoring the corporation's account. However, as late as October 1982 Mr. Pilling advised an officer of the respondent he had $30,000 "on hand". What Mr. Pilling meant by these words is not clear but it would appear to indicate he had money available which at that time could have been made available to the respondent.

The actions of Mr. and Mrs. Pilling were not the same as Mr. and Mrs. Fancy. There is absolutely no evidence that the Pillings gave any consideration to the corporation's obligations under the Act or of their personal liability. Mr. Pilling ran the corporation and Mrs. Pilling followed his instructions without reserve. Payment to the respondent appears never to have been a consideration on the part of the Pillings; the attitude of Mr. Pilling to the statutory obligation of the corporation and his and Mrs. Pilling’s own personal liability was demonstrated in both the corporation and the company incorporated in 1982: payments to the respondent could wait, money was necessary for the operation of the corporation's business. That the bank may have been in control of the corporation's payments does not assist a director when his own actions leave much to be desired.

Mrs. Pilling, as a director of the corporation, had a statutory duty not to blindly follow the instructions of her husband. She was not unaware of what was transpiring.

Both Mr. and Mrs. Pilling lacked any degree of care, diligence and skill to prevent the failure by the corporation to remit deductions that a reasonably prudent person would have exercised in comparable circumstances.

The appeals are dismissed.

Appeals dismissed.