Ralph M. Moore v. Minister of National Revenue, [1988] 2 CTC 2191, 88 DTC 1537

Taylor, T.C.J.:—This is an appeal heard in Toronto, Ontario on March 21 and 22, 1988, against an income tax assessment for the year 1982. The following agreed statement of facts sets out the dispute:

The parties, for the purposes of the appeal herein agree upon the following facts:

1. Ralph Moore was a director and controlling shareholder of the Company Ralph M. Moore Industrial Installations Limited ("RMMII") in 1982. RMMII had a payroll deduction remittance account with Revenue Canada numbered BFX 435 246.

2. Arthur Andersen Inc. was appointed receiver and manager of RMMII on October 29, 1982. Upon appointment, Arthur Andersen Inc. opened a payroll deduction remittance account with Revenue Canada numbered VHG 700 386. [1]

3. At issue in this hearing is the deduction and remittance of federal income tax to the Receiver General from employees of RMMII for the month of September and from October 1 to October 29,1982.

4. Arthur Andersen Inc. on or after October 29, 1982 remitted $11,378.00 to the Receiver General in respect of income tax deducted from wages paid to RMMII employees on October 23, 1982. This amount was remitted in error by Arthur Andersen Inc. to its account VHG 700 386 [2] instead of to the RMMII account BFX 435 246. Arthur Andersen Inc. advised Revenue Canada of this error by letter dated February 1, 1983 and requested that the amount of $11,378.00 be transferred from its account to the RMMII account. Revenue Canada effected this transfer on February 23, 1983. Revenue Canada in assessing the Appellant the amount of RMMII federal income tax liability pursuant to section 227.1 of the Income Tax Act did not reduce such liability by the amount of such transfer. The effect of this transfer upon the federal tax assessed to the Appellant is an issue in this appeal.

5. Revenue Canada assessed RMMII on December 3, 1982 for amounts deducted from employees' wages but not remitted to the Receiver General, which assessment consisted of:

Federal Tax	$23,974.73
Provincial Tax	11,490.85
Canada Pension Plan	4,965.84
Unemployment Insurance	5,212.48
Penalty	4,564.39
Interest	1,010.00

6. On or about 22 November, 1982 Revenue Canada issued a refund of corporate tax in the amount of $57,661.00 to the company in respect of its income tax payable for the year ended March 31, 1982. Arthur Andersen, as receiver and manager of the company cashed this cheque. Revenue Canada subsequently asked that most of this payment be returned to it to cover the tax owing by RMMII as set out in Paragraph 5 above but Arthur Andersen refused the request.

7. The balance of Revenue Canada’s assessment of Ralph Moore is $5,394.00 is based on federal income tax deducted from amounts paid to employees pursuant to a Deferred Profit Sharing Plan in 1982. This claim by Revenue Canada was raised on the basis of a T4A Supplementary form with T4A copies attached dated February 25, 1983 submitted to Revenue Canada.

8. Revenue Canada filed a certificate in the Federal Court of Canada with regard to the indebtedness of RMMII as set out in Paragraphs 5 and 7 herein. The Federal Court issued a Writ of Fieri Facias in respect of such amounts which was delivered to the Sheriff of the Judicial District of Hamilton — Wentworth on or about October 6, 1983. The Writ was returned nulle bona on November 23, 1983.

9. Revenue Canada assessed the Appellant in his capacity as a director of RMMII for the Federal income tax deducted from employees' wages but not remitted by RMMII in September and October (to the 29th day thereof) of 1982, and federal income tax deducted from DPSP payouts to employees in 1982, on November 13, 1984. The assessment included late-filing penalties and interest on the said federal income tax, and was comprised of the following amounts:

Assessment Dec. 3, 1962
Federal Tax	$23,974.73
Penalty	2,396.32
May 6, 1983
Federal Tax	5,394.50
Penalty	10.30
Interest	8,743.19
	$40,519.04

The Court recognizes and appreciates the above statement prepared and filed by counsel for the parties, but certain sections from both the notice of appeal and the reply to notice of appeal could add to the general background:

Notice of Appeal

7. By the end of the summer of 1982 the Company was experiencing severe cash flow difficulties and had extended its borrowings from the Canadian Imperial Bank of Commerce ("the Bank”) to full credit limits.

8. On October 15, 1982, at the request of the Bank, the Company appointed Arthur Andersen Inc. to investigate the Company's financial affairs and to report to the Bank concerning the same.

9. On October 28, 1982 the Bank appointed Arthur Andersen Inc. as receiver and manager of the undertaking, property and assets of the Company that were mortgaged and charged to the Bank.

10. Even before the appointment of Arthur Andersen Inc. to investigate the financial affairs of the Company, the Bank had taken full control over payment of the Company's accounts payable.

11. The Company told the Bank that it wished to remit the source deductions from payments to employees for work in September 1982 but was refused permission by the Bank to pay such source deductions. The Bank informed the Company that the Bank would refuse to honour any cheque issued in respect of the source deductions.

12. The Company understands that following the appointment of Arthur Andersen Inc. as receiver and manager, the receiver and manager paid source deductions for the period during which it carried on the business of the Company from October 1982 to March 1983 but did not pay the source deductions which were payable at the date of appointment of the receiver and manager.

13. Revenue Canada has acknowledged that on or about November 22, 1982 it issued a refund cheque in the amount of $57,661.00 to the Company as a refund of corporation taxes for the fiscal period ending March 31, 1982. We understand that this cheque was cashed by Arthur Andersen Inc. which refused to remit payment for the outstanding payroll deductions.

14. The fact that a tax refund in excess of $57,000 was pending in October 1982 is evidence that the directors of the Company could reasonably believe that the Company could meet its obligations to remit then outstanding payroll deductions of less than $24,000 even if the Company had no access to other cash or assets (which was not the case).

15. By letter dated January 5, 1983 from Revenue Canada's Collection Section to Arthur Andersen Inc. Revenue Canada stated that it knew that on or about October 29,1982 that firm had been appointed receiver manager of the Company. Also Revenue Canada sent to Arthur Andersen Inc. a demand on third parties dated February 28, 1983. These documents evidence that Revenue Canada was fully aware by at least January 5, 1983 that Arthur Andersen Inc. had been receiver manager of the Company and in control of its assets since October 1982. Submission

2. Without limiting the foregoing, the Appellant submits that he exercised the degree of care, diligence and skill in respect of the Corporation's source deduction obligations that a reasonably prudent person would, or could, have exercised in comparable circumstances. The remittances of payroll deductions would have been made if the Bank had not enforced its security against the Company and appointed the receiver and manager thereby wresting control of the business and affairs of the Company from the Company and its directors. The failure to remit the source deductions was caused by the actions of the Bank and not the actions of the Company or its directors.

3. It is submitted that it is not the intention of section 227.1 to impose the harsh burden of corporate liability on an individual in the circumstances of this case. The imposition of legal responsibility and liability on directors presupposes that the directors have the authority and ability to direct the business and affairs of the corporation of which they are directors.

From the reply to notice of appeal:

2. The Respondent does not admit that Arthur Andersen Inc. refused to remit payment for the outstanding payroll deductions but otherwise admits the facts alleged in paragraph 13.

B-8. The Respondent submits that he correctly assessed the Appellant for the amount owing by the Company on November 13, 1984 of $40,519.04 by virtue of subsection 227(1) and section 227.1 of the Income Tax Act.

At the outset of the hearing, counsel for the Minister notified the Court that the amount of $5,394 referenced in paragraph 7 of the agreed statement of facts was no longer in issue, and the Minister would make any necessary adjustments, without the Court making any determination.

In his testimony, Mr. Moore stated that during the summer of 1982 his plant had suffered an employees' work stoppage, and that he had been making every effort to "hold things together" up to and including the months of September and October 1982, believing that the work stoppage would end at any time, and normal operations would resume. In his view he had ample accounts receivables, work in progress, and work orders to more than make up for any obligations the corporation had. He stated that he had only been able to pay the accounts which the bank accepted during the critical period. In essence he regarded himself as virtually powerless to ensure that any particular account — including the employees' income tax deductions was paid. He did not recall ever having specifically requested that the bank do so. He had always signed all cheques, including the deductions remittances under normal circumstances, when presented to him by the company finance officer. There was no separate bank account kept by the company for deductions from employees' salaries and wages.

Documentation and information was presented to the Court regarding the $57,661 corporate tax refund noted in paragraph 6 of the agreed statement of facts, and also the $11,378.70 transfer of employees' tax deductions resulting in tax deductions remittances referenced in paragraph 4 of the same statement. On the corporate tax point, I would quote the final letter on the subject between Arthur Andersen Inc. (or its solicitors) and Revenue Canada:

January 24th, 1983

Revenue Canada, Taxation

150 Main Street West,

Hamilton, Ontario

L8N 3E1

Attention: Collection Section

D. Bronson

Dear Sirs:

Re: Ralph M. Moore Industrial

Installations Ltd.

We are solicitors for Arthur Andersen Inc. as Receivers and Managers of the above company. We have reviewed your correspondence with the Receiver, namely your letters of January 5th and 17th, 1983.

As we understand it, the refund of $57,661.66 has already been made by Revenue Canada. While Revenue Canada may have had a right of set-off in this matter under the provisions of either Section 224.1 or 164(2), after the refund was given there was no debt owing by the Crown and therefore no basis on which a set-off can now be claimed.

Yours very truly,

INCH, EASTERBROOK & SHAKER

(signature)

EAS/HD Edmond A. Shaker

c.c. Arthur Andersen Inc.

On the transfer point, I would note the following excerpt from a letter from Arthur Andersen Inc. to Revenue Canada dated February 1, 1983:

. . . we made a 23 October, 1982 remittance in the amount of $11,378.70 to our Employer No. BHG 700 386 in error. Therefore, would you please make the necessary adjustment to transfer $11,378.70 from Employer No. BHG 700 386 to Employer No. BFX 435 246.

It was acknowledged in evidence that Employee No. BHG 700 386 was Arthur Andersen Inc., and Employer No. BFX 435 426 was RMMII, the corporation before receivership.

Argument

Counsel for the appellant listed three arguments — (1) a "set-off" should be granted to the corporation (and then reflected in turn for this appellant) for the $57,661 corporate tax refund; (2) there should be at least a credit given to the corporation, (and again in turn to the appellant) for the remittance error of the $11,378.70; and (3) the appellant had exercised all the care and diligence which should be required of him, and which was possible under the circumstances, and should not be liable for the corporate debt.

Analysis

On item (1) counsel essentially made the point that, as of November 22, 1982 — the date of the refund in dispute, Revenue Canada knew, or should have known, that a receiver-manager had been appointed and therefore should have retained the refund in its possession. While it can be asserted that Revenue Canada had a right-of-set-off, the Court was not made aware of any provision or jurisprudence which would mandate such a set-off. That particular argument by counsel for the appellant does not serve to invalidate the assessment at issue — it has no direct bearing on the fact that income tax deductions were not remitted as required.

On item (2) above, I am more favourably impressed. Counsel for the respondent basically asserted that without specific direction so to do, Revenue Canada was not empowered to make the transfer of $11,378.70 in the manner requested by the appellant. I do not agree. The direction contained in the letter noted above dealing with the matter is sufficiently exact under the circumstances to accomplish the purpose intended. There is no question from the correspondence with Arthur Andersen Inc. that Revenue Canada was fully aware that the time period for which the deductions were made, was before the appointment of the receiver-manager, and Revenue Canada should have automatically made the appropriate credit. That portion of this assessment against Mr. Moore must be adjusted by a reassessment, and will flow from this judgment.

On point (3) above, the major argument of counsel for the appellant, I cannot agree that Mr. Moore should escape the result which it is becoming increasingly apparent awaits corporate directors under these circumstances. His counsel made every plausable effort to demonstrate the plight of Mr. Moore, and the rationale for the non-remittance. But, in my opinion he cannot plead that he was unfamiliar with the operation of his company. He cannot plead that he had no direct contact with the payment procedures. He cannot plead that he was unaware the obligations to Revenue Canada were being left unattended. He cannot even plead that he did not on a regular basis deal with the remittance of the deductions. He can say that he had substantial financial strain in keeping the company operating during the work stoppage, which included the period of time at issue. He can say that he had very limited, if any, financial flexibility (he would probably say responsibility or authority) for the period before the receiver-manager took over, and certainly it was curtailed after that point. He can say that he would have paid the deductions if the money had been available — in essence if the bank had allowed him more credit. And that is the crux of the problem. The bank had indeed curtailed his credit — would provide no more operating advances — and would only honour cheques which were absolutely vital to keep a minimum operation going — usually after prior approval from the bank. While the general description provided by counsel for the appellant

— "that by September the bank had frozen the company's accounts, and was in control of all payments", may be a little extreme, I certainly accept that Mr. Moore had no further access to credit or funding from the bank. Intending, as he did, that he would keep the company operating, no matter what methods it took, he used and continued to use unauthorized credit from the Crown — the unremitted employees' income tax deductions — as part of the operating capital of the corporation. That is a very harsh way to describe the conduct of Mr. Moore — whom I am sure was attempting to do what he felt was necessary, indeed essential, for the protection and preservation of his company. Nevertheless that is a perspective which can be taken of the matter. The funds so deducted from employees' wages are held in trust on condition that they be remitted to Revenue Canada by the 15 of the following month. To use these trust funds at all even after deductions from the payroll and before remittance day, is a highly questionable procedure. So too is the practice of even keeping these trust funds intermingled with the regular corporate funds, taking a risk. But when the remittance date — the 15 of the month following the deductions — has been reached, the- obligation must be met, or those who have the responsibility of making certain it is met may be held accountable.

Before concluding, I would note a letter signed by Mr. Moore, the appellant, as follows:

CONSENT

To: Canadian Imperial Bank of Commerce

Sherman & Barton

Hamilton, Ontario

L8L 7T5

Re: Ralph M. Moore Industrial Installations Limited

Ralph M. Moore Industrial Installations Limited hereby consents to the appointment on October 29, 1982 by Canadian Imperial Bank of Commerce, under the provisions of Demand Debentures of the Corporation in favour to the Bank dated November 25, 1975 and February 28, 1978, of Arthur Andersen Inc. as Receiver and Manager of all the property of the Corporation.

DATED at Stoney Creek, Ontario

this 29 day of October, 1982.

RALPH M. MOORE INDUSTRIAL INSTALLATIONS LIMITED

Per: (Signed

Ralph M. Moore).

It can be said that as at October 29, 1982, supra, Mr. Moore no longer had any way at all at his disposal to pay the obligation at issue, as a result of the appointment of the Receiver and Manager, — and this was raised as a point in his favour. The counter argument to that, is that Mr. Moore should not have signed the above consent without assurance that the bank would fulfil certain necessary obligations, including the remittances for income tax deductions; or that the bank, would set up in a separate account the moneys deducted, which it could be argued were covered by subsection 227(5) of the Act. I know that probably would have been a hopeless request to the bank, since it would have resulted in increasing on the bank record, the advances to the company. Also in Mr. Moore's defence, it is very probable that his refusal to sign the above consent would not have mattered at all in the end result — the bank undoubtedly could have forced a receivermanager upon the company. But, as I see it, even at this last juncture Mr. Moore did not avail himself of this opportunity — limited as it was — to take positive action regarding the obligations. I would present no view whether this kind of last minute activity by Mr. Moore would have been helpful to his cause in these circumstances. I merely note that it was not done.

The subject of assessments against corporate directors has been well covered in earlier jurisprudence [3] , and I could add little more to what has been said therein. In addition, considerable commentary [4] has recently developed which is worth taking into account. There is no particular satisfaction for the Court that no evidence was brought forward by counsel for the Minister, that either the bank, or the receiver-manager was pursued with regard to this obligation — the role of each coming in for comment and criticism at the hearing. But that is not a matter for immediate consideration in this issue before the Court, although it may well arise under other circumstances. Some moderation and further enlightenment on the subject may arise over time, but for now there is little reason for complacency or naivety on the part of those holding responsibilities as corporate directors. Perhaps a director, far removed from active participation in a company’s affairs, or one who has taken some specific action to reduce or curtail his liability under this type of assessment, may clarify the limits of action available to Revenue Canada, but I do not see that in this matter.

Summary

It has not been shown to the Court that Mr. Moore “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) of the Act). In particular Mr. Moore did not exercise the skill, knowledge, and experience he had accumulated over many years in the direct management of the corporation. Instead he left himself at continued risk, and did so as a calculated gamble, which did not pay off. To that extent the appeal fails. However to the degree required to correct the error made by Revenue Canada in transferring the amount $11,378.70 referenced earlier, the appeal will be allowed.

I have considered the matter of costs, and I have concluded that it would be reasonable that the appellant be entitled to party-and-party costs. First, success with regard to the $11,378.70 out of an amount now in issue of $40,519.04 should be considered substantial; and second, while the legal arguments made on behalf of the appellant regarding the corporate tax refund of $57,661.00 were not persuasive to me, I do recognize that with a little more care and diligence Revenue Canada might have avoided this entire matter, by retaining this amount and using it as a set-off. After all, a main point at issue in this appeal, is an appropriate level for the exercise of care and diligence by the appellant, and one might carefully look at the conduct of the respondent also from that perspective.

The appeal is allowed, and the matter is referred back to the respondent, in order that the assessment be reduced by $11,378.70, plus any amount of interest thereon reflected in the current assessment. In all other respects the appeal is dismissed. The appellant is entitled to party-and-party costs. The entire matter is referred back to the respondent for reconsideration and reassessment in accordance with these reasons for judgment.

Appeal allowed in part.