Cadrin v. R., [1999] 3 CTC 366, 99 DTC 5079

Décary J.A.:

According to the respondent, the appellant, in his capacity as director of the Société Elzéar Plourde Ltée during the period at issue, became jointly and severally liable under section 227.1 of the Income Tax Act, S.C. 1970- 71-72, c. 63, as amended (the Act), where a corporation fails to deduct or withhold certain amounts at the source. It is clear that under subsection 3 of this section, “[a] director is not liable ... 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”.

The Judge of the Tax Court of Canada found the appellant liable in a decision [1] issued before this Court clarified the interpretation to be given to subsection 227. 1(3) of the Act in Soper v. R. (1997), [1998] 1 F.C. 124 (Fed. C.A.). In Soper, Mr. Justice Robertson made a distinction between “inside directors” (“meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs”) who “will have the most difficulty in establishing the due diligence defence” (at p. 156) and the “outside directors” for whom, “unless there is reason for suspicion”, it is permissible “to rely on the day-to-day corporate managers to be responsible for the payment of debt obligations such as those owing to Her Majesty” and who have a duty to act when they “[obtain] information, or [become] aware of facts, which might lead [them] to conclude that there is, or could reasonably be, a potential problem with remittances” (at p. 160). Robertson J.A. added, “Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem”.

First, counsel for the appellant argued that the simple fact that an outside director is unaware and does not take steps to learn of the duties which the law imposes on him is sufficient, according to Soper, to exonerate him from all liability. This argument is without merit. Robertson J.A. took great care to clarify that “total passivity and irresponsibility” are no excuse, “that the law today can scarcely be said to embrace the principle that the less a director does or knows or cares, the less likely it is that he or she will be held liable” and that “the statutory standard of care will surely be interpreted and applied in a manner which encourages responsibility” (at p. 146). It is true that the standard of the reasonable person “adjusts to the circumstances and to the individual qualities of the actor” (at p. 152) and that “more is expected of individuals with superior qualifications” (at p. 155), but the fact remains that the law requires a minimum amount of care, however variable, and that a total lack of care does not meet the requirements of the law. If the appellant’s only excuse were total passivity based on total ignorance, he would not escape liability under subsection 3 of section 227.1.

Second, counsel for the appellant argued that even if ignorance is no excuse (as we have just stated), it is nonetheless not fatal. As soon as an outside director does, without knowing as it were, what he should have done under the circumstances had he been aware of the situation, he would escape all liability.

This argument is sound in the instant case. The outside director who gets involved to the extent of his role in the business and his abilities meets the standard of care in principle. If he ensures that the business is viable before investing money in it, if he surrounds himself with reliable and competent people who undertake the day-to-day management of the business, if he stays generally informed about what is happening, if nothing happens which should arouse suspicion about the payment of the corporation’s liabilities, if he acts quickly when problems arise, he should not as a general rule be held liable.

In our view, had the Trial Judge been aware of the criteria this Court has since set in Soper and particularly the different approach to be taken depending on whether it is an inside or outside director, he would necessarily have come to the conclusion that the appellant was not liable.

The appellant was in fact just a silent partner, who, moreover, functioned from a distance, as his own affairs were conducted from Quebec City and those of the business in which he had invested, from Jonquière. He had taken all of the business and accounting precautions before investing and had every reason to rely on the day-to-day management which his partner had undertaken. He regularly inquired about the affairs of the business and was unaware of any problems. The Judge stated that at the end of 1990, [TRANSLATION] “the management of the company ... seemed excellent and very competent” and that the managing partner “always insisted that the company was in an excellent financial position”. The Judge also held that it was only at the beginning of December 1991 that the appellant found out through his bank statements that for the first time, the corporation had not paid him the monthly loan payment and he learned from his partner that the company was “in difficulty”. The appellant reacted immediately. He summoned his partner at once to Quebec City for a meeting with his accountant and an audit of the financial statements. On the day at issue, namely December 12, 1991, the accountant audited the corporation’s books and stated that it was headed for a loss of $200,000.00 at the end of December 1991. (The Trial Judge erred in finding that this loss occurred in February 1991.) The appellant then tried to convince members of his family to help him to save the business, but in vain. On December 16, 1991, the appellant went to Jonquière to meet the manager of the bank with which the corporation did business. When the corporation’s vulnerable financial position was confirmed, he contacted his lawyers in Quebec City who immediately dictated to him a letter of resignation as director.

It also appears from various documents and testimony that in his findings of fact, the Trial Judge did not take into consideration that for several months, the managing partner had hidden certain problems from the appellant and had even misappropriated funds in the amount of approximately $155,000.00 in the fall of 1991.

In these circumstances, knowing that the appellant’s alleged liability is for the months of September, November and December 1991 (and curiously not October 1991), the Trial Judge could not find that the appellant demonstrated culpable passivity. The Judge dealt with the matter as if the appellant was an inside director, which he was not.

The appeal will be allowed, the judgment of the Tax Court of Canada will be reversed, the appellant’s appeal of the assessment issued by the Minister of National Revenue for 1991 will be allowed and the assessment in the amount of $28,985.00 will be set aside. The appellant is entitled to costs before this Court and the Tax Court of Canada.

Appeal allowed.