Farrell v. R., [1997] 2 CTC 2934

Rip T.CJ.:

Graham Farrell appeals from an assessment of tax, notice of which is dated December 30, 1994 (Number 31782), issued by the Minister of National Revenue (“Minister”) in accordance with paragraph 227(l)(a) of the Income Tax Act (“Act”). The Minister says that Summerwood Products Inc. (“Summerwood” or “Company”) failed to deduct or withhold amounts (“source deductions”) from salary, wages or remuneration paid to employees and remit that amount to the Receiver General for Canada at the prescribed times on account of the payees’ income tax for the year pursuant to paragraph 153( 1)(#) of the Act. The failures to remit took place during autumn 1992. The appellant was one of three directors of Summerwood at the times the Company failed to deduct or remit the amounts and therefore, says the Minister, pursuant to subsection 227.1(1), he is jointly and severally liable together with the corporation and the other directors to pay that amount and any interest and penalties.

Mr. Farrell appealed on the basis he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances and therefore is not liable for the Company’s failures to withhold and remit the source deductions: subsection 227.1(3).

The appellant and his two friends at the time, Peter Harvey and Bruce Jenkins, started the business carried on by Summerwood in 1988 in partnership. The business consisted of manufacturing garden sheds, gazebos and related products. In 1990 the business was incorporated and each of Farrell, Harvey and Jenkins became directors, officers and equal shareholders. Each director was in charge of a specific area of the business. Jenkins was president. He worked at the workshop and was in charge of the workshop and production. Harvey was secretary and had administrative financial responsibility. He also acted as the Company’s controller. Farrell was vice-president and worked out of the office on sales, supervising and working on installing products.

In the business’ best years, according to Farrell, annual sales approached $1,000,000. However, in 1992, the economy was “bleak” and the business suffered, despite “our best efforts”. The Company had a line of credit of $60,000 with the Toronto-Dominion Bank (“Bank”). The Bank was concerned the Company was not making enough money. “They said they wanted their money and curtailed the line of credit”. The Bank “put the Company into receivership” on November 27, 1992. At the time this was happening, the relationship between the appellant and the other two directors were “acrimonious” but the business continued.

No formal meetings of directors of the Company were ever held, declared Mr. Farrell, but the three directors talked every day about sales, busi ness and “what to do over the next days”. The appellant stated “Peter never indicated he was not remitting to” the Receiver General and “we’d never ask” because there was no reason to do so. “My job was to sell”. There were “three guys running a company and there was no time to duplicate the other’s work”.

The appellant said he trusted Mr. Harvey. They were friends before “we got the business... We worked at advertising together... He was an usher at my wedding...”. He considered Harvey his “best friend”.

The appellant was of the view that “for five years [we] remitted faithfully”. It was only during the “last two or three months”, according to the appellant, the Company failed to remit.

In correspondence, dated June 21, 1994, to Revenue Canada by Mr. Harvey, Mr. Harvey opined that “the demise of the Company was triggered by a Ministry of Revenue audit in September 1992...”. The difficulty with the Provincial Sales Tax office, he wrote, was based on a misunderstanding of the Ontario Retail Sales Tax Act. Mr. Farrell agreed with this view.

Mr. Farrell testified that about a month before November 27, 1992 the Toronto-Dominion Bank stopped honouring cheques issued by Summerwood. He recalled he deposited a cheque in the amount of $7,000 n the Bank and then could not access the money.

Summerwood employed approximately 16 people. The payroll was prepared on the Company’s own computer. The employees were paid by cheque every two weeks, on the 15th and last working day of each month. The payroll cheques were distributed manually to the employees.

Mr. Harvey was in charge of the Company’s deposits and issuance of cheques. When he was away the other directors, including the appellant, signed the cheques. All three directors had cheque signing authority.

The Company had a chequing account at Canada Trust. That account was not affected by the action taken against the Company by the Toronto- Dominion Bank. During October and November 1992, monies were deposited and withdrawn from this account on the normal course of the Company’s business. The Company had daily revenue at the time of about $5,000 and the balance in the Canada Trust account varied between zero and $5,000. The appellant stated “We lived day-to-day”.

Mr. Farrell explained the Toronto-Dominion Bank branch was some distance from the Company’s premises in Markham and that the Canada Trust branch was “down the street”. His father-in-law dealt with the branch of the Bank and directed the Company to that branch when he guaranteed the Company’s line of credit. The appellant also guaranteed the Company’s liability to banks; apparently, the other directors did not.

As difficulties were encountered with the Toronto-Dominion Bank, “financial activity” moved to Canada Trust. He explained the directors “knew receivership was coming and wanted to continue [in business]... [There was] no cash flow at TD Bank ... so [we] used Canada Trust”.

It appears from the documents filed as exhibit, that Summerwood’s last payment of source deductions to the Receiver General was on October 15, 1992. This payment of $3,062.71 was for amounts withheld from wages paid in September. The amount of $3,062.71 appears to have been paid at Canada Trust — a Canada Trust stamp is on the remittance — but the remittance was returned.

According to Mr. Harvey’s June 21, 1994 letter to Revenue Canada, the last payment of source deductions was made on November 13, 1992 in the amount of $7,371.16. Mr. Farrell agreed such payment was made but there was no evidence to support this claim. A Revenue Canada remittance form, duly completed in the amount of $7,371.16, is included among the documentary evidence, but there is no receipt of remittance by Revenue Canada, a bank or trust company, although the amount does appear as a credit in Summerwood’s General Ledger.

During the months of October and November 1992, the aggregate of $7,260.19 was withdrawn by Summerwood for salaries to the directors. The appellant acknowledged that during the months of September, October and November 1992 the Company’s suppliers were paid, as were its employees.

Mr. Farrell declared he made “every effort to pay” the first time he realized any source deductions had not been remitted. That was when he was contacted by Revenue Canada. However this “effort” would have been made after the fact the Company failed to remit.

Once the Receiver was appointed, the Receiver carried on the business until the business was sold. Mr. Farrell left the Company the day the Receiver was appointed.

The Minister assessed Summerwood on January 8, 1992, November 20, 1992, November 26, 1992 and December 18, 1992 unpaid amounts of deductions, interest and penalties under the Act and other statutes. The appel lant was under the impression that before October 1992, Summerwood had consistently remitted source deductions. It appears from documents tendered in evidence that Summerwood may have been sometimes late in making remissions and may also have been short in calculating the amounts due.

In my view, Mr. Farrell did not exercise the degree of care, diligence and skill to prevent the failure of Summerwood to remit that a reasonably prudent person would have exercised in comparable circumstances. He is not freed of his liability by virtue of subsection 227.1(3) of the Act.

Mr. Farrell did absolutely nothing to prevent the failure to remit source deductions to the Receiver General for Canada. He, Harvey and Jenkins, were equally involved in Summerwood’s business at all relevant times. So long as everything was going well the appellant trusted the other two directors. Indeed, as late as June 21, 1994, Mr. Farrell entrusted negotiations with Revenue Canada respecting the indebtedness of Summerwood to the Crown to Mr. Harvey.

Together, the three directors acted in concert, as far as I surmise, even to the extent of the Company operating out of two bank accounts. Mr. Farrell testified he and the other directors realized “receivership was coming” yet did nothing to ensure the payment of the source deductions to the Receiver General. Suppliers were paid but not the Receiver General.

I can find no case law that would assist Mr. Farrell in his appeal. One cannot escape the fact that all three directors, including the appellant, were oblivious to their responsibilities under the Act. See, for example, Fraser (Trustee of) v. Minister of National Revenue, (1987), 87 D.T.C. 250 (T.C.C.).

The appellant ceased to act as director on November 27, 1992. From that day on he was in no position to prevent the failure of the Company to remit source deductions for November which were due only on December 15, 1992. The evidence does not indicate whether the assessment of December 18, 1992 is in respect of amounts withheld from employees’ wages in November; respondent’s counsel advised that such information was not available from the files he had with him at trial.

Accordingly, the appeal will be allowed without costs and the assessment will be referred back to the Minister to delete, if necessary, any portion of the amount assessed relating to source deductions Summerwood failed to remit as required after November 27, 1992. The appellant will not be entitled to any other relief.

Appeal allowed.