Hanson v. R., [1997] 1 CTC 2456

Sarchuk J.T.C.C.: - This is in the matter of Jane Hanson versus Her Majesty The Queen. The matter for determination in this appeal is whether the Appellant is vicariously liable under subsection 227.1(1) of the Income Tax Act in respect of the failure by Telfer’s Restaurant Inc., hereafter referred to as the “Corporation”, to remit federal income tax deducted at source, and for penalties relating thereto.

The date of the assessment was December 1, 1992 and it appears to be related to failures to remit for the period August 1990 to September 1991. The sole issue is whether the Appellant can avoid liability imposed by subsection 227.1(3) of the Act which provides that:

A director is not liable for a failure under subsection (1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

The events leading up to the assessment may briefly be summarized as follows: Telfer Restaurant has carried on business since approximately 1982. The Hanson family had significant holdings in the Corporation which owned the restaurant and in a related company. In or about 1989 these corporations made assignments in bankruptcy and their assets were placed in the hands of a receiver. Telfer, the Appellant’s son, had been the manager of the restaurant in that period of time.

Telfer and the Hanson family discussed the possibility of reacquiring the restaurant since, as the Appellant said, it had always been profitable. They, together with another investor, PCIL, decided to purchase the restaurant from the receiver. A family cottage, title to which was in the name of the Appellant, was mortgaged and the amount obtained thereby was advanced towards the purchase price. A numbered company, 887462 Ontario Limited was incorporated to hold the Hanson interest in the acquisition, the shareholders of which were Telfer with 51 per cent, and the Appellant with 49 per cent.

In due course another company was incorporated, 874990 Ontario Limited, later, I believe, to become Telfer’s Restaurant Inc., to hold the restaurant asset. 887462 owned 61 per cent of the shares in this company, and PCIL owned the balance. The affairs of this corporation were to be managed by five directors, and 887462 had the right to nominate three. Telfer was to be the president and secretary, and as well was to manage the business and to be responsible for its operation.

According to Telfer, he had initially intended that there be only two directors, but someone in PCIL demurred, and five was the number ultimately agreed upon. Telfer says he then approached his brother and his mother, who both agreed to act as directors. Neither Telfer or his mother have any recollection of the discussions which took place regarding this decision.

The Appellant is a trained nurse. She had retired in 1982, but returned to work in 1990 as a result of certain financial pressures which arose when the previous businesses ran into financial trouble. During the relevant periods of time she was employed, I believe, in a supervisory capacity at a large nursing home in Gananoque. She testified that she knew nothing about the restaurant business, and had no interest in it as she was busy with other matters. In her view, she had no responsibilities as director, nor did she ask Telfer, or anyone else, what her role or duties or responsibilities were. She was, however, aware of the fact that she was a director, and that in order to assure that they had a majority of the directors on the Board.

Telfer’s testimony regarding their discussions was equally equivocal. He said he did not remember what he explained to her, but “would have assumed that he explained things to her”, including the requirement for five directors. What these “things” were is unknown.

The Appellant’s position is that the requirements set forth in subsection 227.1(3) have been met, i.e. the Appellant exercised the degree of care, diligence and skill to prevent a failure that a reasonably prudent person would have exercised in comparable circumstances. The circumstances which are considered relevant by the Appellant include the fact that she became a director at the request of her son, who was himself a director and the manager of the business. She was a person with no business experience, and who, as a director, remained totally uninvolved with management, administration and the day-to-day operations of the business. Furthermore, she had no knowledge of the rights, responsibilities and obligations of a director, and, if I understood counsel for the Appellant, in the present circumstances did not need to enquire in order to find out. Furthermore, she lived far away and was involved in her own affairs and had no time to devote to the business or to her responsibilities as director. Counsel argued that, in essence, she was no more than a nominee or a titular director.

Counsel for the Appellant relied on a number of decisions to advance the proposition that in certain circumstances, directors who are that in name only, have been absolved of liability. The cases referred to are Robitaille v. R., (sub nom. Robitaille v. Canada) [1990] 1 C.T.C. 121, 90 D.T.C. 6059 (F.C.T.D.); Cloutier v. Minister of National Revenue, [1993] 2 C.T.C. 2038, (sub nom. Molyneaux v. Minister of National Revenue) 93 D.T.C. 544 (T.C.C.); Cybulski v. Minister of National Revenue, [1988] 2 C.T.C. 2180, 88 D.T.C. 1531 (T.C.C.); Pidskalny v. Minister of National Revenue, [1991] 2 C.T.C. 2192, 91 D.T.C. 1046 (T.C.C.); Fitzgerald v. Minister of National Revenue, [1991] 2 C.T.C. 2595, 92 D.T.C. 1019 (T.C.C.); Noonan v. Minister of National Revenue, [1991] 1 C.T.C. 2371, 91 D.T.C. 416 (T.C.C.); Sheremeta v. Minister of National Revenue, [1991] 1 C.T.C. 2593, 91 D.T.C. 867 (T.C.C.) and Dumont c. Ministre du Revenu national, (sub nom. Dumont v. Minister of National Revenue) [1996] 1 C.T.C. 2407 (sub nom. Dumont v. R.) 96 D.T.C. 1075.

Counsel for the Appellant contends that the decisions in these cases affirm the principle that passive directors particularly in familial situations ought not to be found liable under subsection 227.1(3) and that this principle must be followed. He further says that a line of cases, exemplified by Black v. R., (sub nom. Black v. Canada) [1993] 2 C.T.C. 2825, 93 D.T.C. 1212 (T.C.C.) and Stuart v. Minister of National Revenue, [1995] 2 C.T.C. 2458(D), (sub nom. Stuart v. R.) 95 D.T.C. 537 (T.C.C.), misstate the meaning to be given to the relevant legislative language.

I do not agree. First, and it is a trite law, each case must be examined and the issue determined on its own facts. Accordingly, some of the cases cited are distinguishable, but that is not the major basis upon which I have made my decision.

In Stuart the director referred to himself as a puppet or titular director. He was entirely passive in his role, never asserting himself as such and never making enquiries about his responsibilities. The issue dealt with by Christie A.C.J.T.C., was stated thus at page 539 and I quote:

The significant question that arises is this: can an individual who consents to being appointed as director of a corporation escape liability under subsection 227.1 of the Act by, for all practical purposes, ignoring its existence thereafter? In my opinion the answer is no.

Christie J. went on to say:

The appellant relies on Pidskalny v. Minister of National Revenue, 91 D.T.C. 1046 (T.C.C.), and he cites the headnote. In that case the appellant was held not to be liable under subsection 227.1(1). The headnote reads in part as follows:

At all material times, the taxpayer’s directorship of R. Ltd. had been purely titular. He was wholly uninvolved with the company and had no knowledge of the rights, responsibilities and obligations of a directorship. He was therefore totally free of any personal liability for the unremitted source deductions in issue.

I cannot accept this as a correct statement of the law, and it is noted that in Black v. R., [1993] 2 C.T.C. 2825, 93 D.T.C. 1212 (T.C.C.), Bonner J.T.C.C. considered Pidskalny.

Before proceeding to the Black decision, I stop to note that I completely agree with the conclusion reached by Christie. In Black - and I concede that the circumstances in this case and Stuart are not analogous to the appeal before me but the principles are applicable nonetheless. In Black, as I began to say, Bonner J. made the following comment at page 2828 (D.T.C. 1215):

The appellant cannot take shelter under subsection 227.1(3) by claiming that his actions met the standard of a reasonably prudent person who was ill-informed as to the requirements of the Act. A reasonably prudent person who is aware that he is a director but who is uncertain as to the extent of his responsibilities as director is under a duty to at least attempt to discover what is required of him and to discharge that duty.

He went on to say at page 2828:

The decision of this Court in Pidskalny appears to suggest that subsection 227.1(3) protects a director who failed to try to prevent a failure to remit because he had no knowledge of the rights, responsibilities and obligations of a directorship and was uninvolved with the management of the company. If that were the ratio of the decision it would be very difficult to reconcile with the language of section 227.1. Nothing in that language suggests the existence of a legislative intention to offer relief to a director who fails to act because he is ignorant of and indifferent to his responsibilities and those of his company. It is illogical for example to suggest that a person who drives his vehicle in heavy traffic with his eyes firmly shut cannot be negligent because he is unaware of the existence of a duty to those he is about to injure. It is equally illogical to suggest that a director who is ignorant of his responsibilities and who fails to attempt to identify and fulfil them can meet the 227.1(3) standard.

And, at page 2828:

The purpose of section 227.1 cannot be ignored. In clear language subsection (1) imposes liability on all directors and not just on those who are aware of the relevant provisions of the Act. Subsection 227.1(3) offers protection to those who exercise the degree of care that a reasonably prudent person would have exercised in comparable circumstances. It is illogical and inconsistent with the evident purpose of the section to suggest that the legislature contemplated that the standard of a reasonably prudent person is met by directors who make no effort to discover what the law requires of them and to comply with it.

In my view that is a correct statement of the law.

Counsel for the Appellant argued that there are special circumstances in this case, and in the other cases, which warranted the application — acceptance perhaps is a better word, of the due diligence of defence.

I return to the judgment of Stuart where Christie J. made the following comment:

It strikes me that if a corporation fails to deduct and remit an amount as required by the Act and Regulations, a director of the corporation is liable to pay that amount and any interest and penalties related thereto unless he establishes that in relation to preventing the failure his conduct was that of a reasonably prudent person in the circumstances. To voluntarily abdicate the responsibilities of the office of director is not of itself conduct of that kind. Intervention by some relevant factor can, however, bring an individual within the scope of subsection 227.1(3). These are some examples relating to deductions at source: a bona fide belief by an appellant based on reasonable grounds that he ceased to be a director prior to the failure alleged to give rise to liability under subsection 227.1(1), or if an appellant is effectively barred from exercising influence over the management of the company by the persons in de facto control of its affairs.

No such facts exist in the present case. Christie J. also referred to the judgment of Mogan T.C.J., in Fitzgerald in this context, at page 2598 (D.T.C. 1021) where he said:

I would not hold as a general rule that a passive or inactive director is free from liability under subsection 227.1(1) of the Income Tax Act.

and, at page 2598:

...But when the passive or inactive director has become a director in the context of a family business operated by a corporation which is dominated by an uncompromising patriarch, the domestic responsibility for maintaining harmony within the family becomes interwoven with the legal responsibility to third parties and, in these circumstances, I think that it is not reasonable to impose the same standard of care, diligence and skill on the passive “family director” as on the person who is truly free to become a director and does so outside a family context.

If, indeed, this is a correct interpretation, no such evidence is present in this appeal, other than the fact that she, that is the Appellant, was involved in a family context. There is no evidence of a dominant person, in my view. Frankly I have difficulty in seeing how a distinction can be made between a person who consents to being a director of a corporation in order to accommodate a friend or client, and then fails to participate as a director in the affairs of the corporation, can escape risk under section 227.1(1), as Mogan J. stated.

How does one distinguish, and on what reasonable basis do you distinguish between a person who is not a friend or a client, but a member of the family, who becomes a director in order to accommodate a situation such as we have here and be free of the liability under subsection 227.1(1)? In my view, the family context in this appeal played a marginal role in the decision-making process.

On the facts before me, it would be difficult to conclude that the Appellant was anything but a willing and involved participant, and a relatively knowledgeable participant in the acquisition of the restaurant. She and her son consistently spoke of family decisions and she participated in the decisions. She was aware that the previous incarnation of the restaurant failed, and was, I am sure, since both her husband and sons were involved, privy to the problems that arose, and privy to discussions which took place. The decision to repurchase - before I leave that point, some of her testimony indicates that, I might add.

The decision to repurchase involved her directly. She encumbered her property to borrow the money which formed part of the purchase price. She owned 49 per cent of the holding company which invested in the restaurant business. Although her son managed the business, I do not accept that she was as naive in business matters as counsel would have us believe. As well, it is a fact that this Appellant was an owner/director of the corporation. She has thus taken advantage of incorporation. In my view, a director in the normal course, should not obtain the benefits of an incorporation under the Business Corporations Act without accepting the responsibilities as well. Finally, there is also evidence that she obviously knew enough to resign as director when it would appear that major problems, once again, struck their business.

I go back to what Mogan J. said in Fitzgerald and note that the factors which existed there cannot readily be discerned in this appeal, as I said before, other than for the matter of familial connection. That, in my view, by itself, is not sufficient; absent some extremely unusual circumstances. The mere fact that one becomes a director in a family context is not sufficient to permit such director to turn his or her back on the affairs of the company; to ignore it for all practical purposes; to ignore her responsibilities; indeed, to fail to ask even the most rudimentary question as to what those responsibilities are, and thereby to escape liability under the provisions of the Income Tax Act.

Before concluding I would like to make reference to a very recent decision, although the facts are not at all alike. In Wilson v. R., 96 D.T.C. 6417, (sub nom. Wilson v. Minister of National Revenue) 114 F.T.R. 298 Simpson J. makes comments at pages 6424-25 which indicate an acceptance of the ratio expressed by Bonner J. in Black, supra.

As I said before, the fact situation is substantially different and I am not referring to this case for that purpose. The taxpayer in Wilson was the actual manager and primary shareholder of the corporation. The argument which was submitted, included a comment by counsel for the Appellant that an analysis of the case law, as disclosed there had developed both a liberal and a conservative approach to the defence utilized as much as was referred to in this case.

That did not avail the taxpayer, in Wilson. The taxpayer failed to inform himself about his obligations and those of the companies. Simpson J. found that he did not know any remittances were required, that he was unaware of the need for a trust account and so forth. The fact was that he had simply delegated and relied on somebody else to do everything, and as the Court observed did so from a position of ignorance.

In this regard I am attracted by the following passage from a decision of Bonner J.T.C.C. in Black, supra, at page 2828:

The appellant cannot take shelter under subsection 227.1(3) by claiming that his actions met the standard of a reasonably prudent person who was ill-informed as to the requirements of the Act. A reasonably prudent person who is aware that he is a director but who is uncertain as to the extent of his responsibilities as director is under a duty to at least attempt to discover what is required of him and to discharge that duty.

I note that counsel for the Appellant has indicated that in his opinion, this is a minority view that is taken by only several judges of the Tax Court. I point out that Wilson is a recent decision by a judge of the Federal Court Trial Division, in which the Court appears to have adopted that same position, correctly, I believe.

One further matter remains to be dealt with. The corporation was assessed for failure to remit for what appears to have been an extended period of time in 1991. It stopped operations in September 1991, and made an assignment in bankruptcy on December 19, 1991. The Respondent has agreed that this Appellant tendered her resignation effective July 7, 1991. The pleadings do not disclose with any particularity, the amounts assessed with respect to the failures to remit prior or after that date.

Accordingly, since the Minister has consented to the Appellant’s position with respect to the resignation, the appeal will be allowed, and the matter will be directed back to the Minister for reassessment on the basis that this Appellant’s liability is to be calculated taking into account the date of her resignation.

I might add that if the numbers are available, and counsel wished to submit them to me within the next week or so, I will incorporate them into the order. If they are not available, then the order will go simply in an open-ended form, which is frankly not my preference, but if need be it will go in that form.

Appeal allowed.