Macdonald v. R., [1998] 4 CTC 2067

Margeson T.C.J.:

The appeals are from an assessment, notice of which was numbered 0247, dated May 30, 1995, whereby the Minister of National Revenue (“the Minister”) assessed the Appellant pursuant to subsection 227.1(1) of the Income Tax Act (the "Act"), section 21.1 of the Canada Pension Act, and section 54 of the Unemployment Insurance Act, relating to unpaid deductions, interest and penalties owing by Cape Breton Holdings (1984) Ltd., and from an assessment number 58712, dated February 23, 1995, whereby the Minister assessed the Appellant for goods and services tax collected but not remitted by Cape Breton Holdings (1984) Limited - In Bankruptcy and for penalties and interest relating thereto.

Evidence

By agreement Exhibits A-l and A-2 were admitted as exhibits without restrictions. Exhibit A-3 was a Book of Documents admitted on behalf of the Appellant and was marked as an exhibit for identification purposes only, but the contents of which was subject to proof, admissibility and weight.

The factual situation giving rise to these appeals centred around the operations of Cape Breton Holdings Limited which changed its name in November 1994 to Cape Breton Holdings (1984) Limited; and a company called Vista Motels Limited. To some extent three motels were involved in this case, namely, Wandlyn Motel, Vista Motel and The Cape Bretoner Motel. However, at the time of the assessments under appeal the operating company was Cape Breton Holdings (1984) Limited.

Joseph Michael MacMullen was a chartered accountant and was familiar with the company called Cape Breton Holdings Limited which had originally been started by a person who came to be known as “Scotchie” MacDonald (Scotchie) and one John Smith who operated a property known as the Wandlyn Motel. At that time Scotchie was president but was not involved in the day-to-day operation of the motel. However, he was a very active director. The manager was John W. Smith who was also a shareholder. The Appellant had no involvement with Cape Breton Holdings Limited and this witness did not become involved with the Appellant until his involvement with Vista Motels Limited which operated Vista Motel. Mr. James G. MacDonald was a shareholder in Vista Motels Limited, had been at one or two financing meetings but was not directly involved in the day- to-day operation. It was his position that Scotchie would call the Appellant about renovations but he had little to do with the day-to-day operation even up to 1985. Financial decisions were made by Scotchie and Gordon Heading (Heading) with the witness giving advice. Scotchie was very involved until 1984 and he would make the decisions. He had the resources and would have initially borrowed money against his insurance policies to commence the operation.

He was referred to Exhibit A-l Tab 3 which indicated that the Appellant was involved with the Vista Motel as early as 1973 and was also an officer on that date. He was referred to a letter in Exhibit A-3 Tab 3 dated March 4, 1983 which showed that Vista Motel Limited was a wholly-owned subsidiary of Cape Breton Holdings Limited at that time. His instructions were received from Scotchie and Gordon Heading. He could not remember that James G. MacDonald had any involvement with his instructions at that time.

He described how the operations of the Vista Motel and the Cape Bretoner Motel were amalgamated in 1984 due to financial difficulties and to some extent to effect tax savings. He did not know if the Appellant was there at that time. He left the area in 1984 and moved to Ontario. He was referred to the Amalgamation Agreement in Exhibit A-1 Tab 26 but said that he did not know much about it.

He was the Executor and Trustee of the Estates of Scotchie MacDonald and his wife Mary but these estates were closed and no claims were made against these estates by Revenue Canada with respect to the outstanding amounts in issue in these appeals. He did say that there were sufficient assets in these estates to pay the present claims.

In cross-examination he was unable to say whether or not the Appellant had been the president of Cape Breton Holdings Limited apart from this being indicated in the minutes of the annual meetings as far back as 1974. In any event he said that the Appellant never behaved as a president and that he only dealt with Scotchie.

From the records presented to him, he confirmed that the Appellant was a first director of the amalgamated companies and that he signed on behalf of Cape Breton Holdings (1984) Limited. He (the witness) did not speak to any directors with respect to GST or income tax remittances except at year end to see that the accounts were paid. Otherwise he might speak to the directors as and when needed. There would be an annual meeting with Scotchie and Gordon Heading to discuss the operation but he would not attend the meeting in person. He believed that his discussion with them would go forward to the annual meeting of the board of directors.

In re-direct he confirmed that Scotchie was owed $138,000 by various companies at the time of his death and that this amount was not recovered by the estate. It was written off as a business loss. In response to a question by the Court he indicated that he dealt with Scotchie because he continued to act as he had always done.

Gordon Heading testified that he is the general manager of the Best Western (Northstar) Hotel in North Sydney. He had experience in the hotel business since 1964. He had been involved to some extent with the Wand- lyn Motel, Vista Motel, the Ingonish Motel, Cape Breton Highland Bungalows and the Cape Bretoner Motel.

In the 1960s he was the owner of a construction company and had a contract to do carpeting and paving at the Wandlyn Motel. He moved his office there at the request of Scotchie to oversee the construction. It was his position at that time that he went to took after the interest of John Smith and Scotchie. He remained there until the project was finished. This motel was owned by Cape Breton Holdings Limited. In 1968 he received 25 shares for his work on the motel and he stayed on as manager. He described John Smith and Scotchie as the main owners but he subsequently took additional shares.

The Appellant signed the 1968 minutes and was president in 1972. He was unaware of the shares purchased by the Appellant in the Vista Motel in 1973. He said that he understood that Jim MacDonald was a shareholder in 1974 but he never drew a salary from the company. He did admit that the Appellant and himself would have general discussions about the financing of the operation but the Appellant was not involved in the general running of the business. Jim MacDonald might have had cheque writing authority in 1983 in the operation of the Vista Motel and Cape Bretoner. He identified the documents which showed that James G. MacDonald was the president of Cape Breton Holdings Limited at least as far back as May 26, 1981.

From his evidence it appeared that financial difficulties had commenced almost from the time that the Cape Bretoner was obtained. Take-over was delayed until October, consequently the operators lost the summer income, they had a bad fall and winter and the summer of 1983 was not good. By March 1984 a lien for taxes had been placed against the property. The Appellant and this witness had put $10,000 into the capital of the company when the Cape Bretoner was purchased.

A tax sale was averted when Scotchie came up with $110,000 to pay the taxes and the operation continued. When the Vista Motel and Cape Bretoner Motel operations were amalgamated the Appellant, Gordon Heading and Scotchie’s wife had equal shares although Scotchie was considered to be owner, the one who put in the money and gave instructions. By 1985 both motels were operated by Cape Breton Holdings (1984) Limited.

In the late 1980s further financial difficulties developed when a federal government agency, ACOA, came up with substantial amounts of money for new motel construction. This placed an additional burden on the operations of Cape Breton Holdings (1984) Limited and concern was voiced by Heading in this regard. He was of the opinion that there was an overbuilding in the motel business when the number of rooms available went from 500 to 1,000 in the Sydney area in one year. After the amalgamation had taken place further financing was required through RoyNat Inc. (RoyNat) and apart from signing the documentation for this financing the Appellant and Heading signed personal guaranties to RoyNat on September 24, 1985. The liability of the Appellant was limited to $50,000 as was that of Heading. In 1988 Cape Breton Holdings (1984) Limited was able to receive “topping-up” financing from the ACOA action program. Renovations were commenced at the Cape Bretoner Motel but it was overbudget and one Kim McCallum (McCallum) came up with an additional $300,000 and took preferred shares in the operation. These preferred shares were issued to Acorn Investments Limited. Again on November 23, 1988 the Appellant and Heading signed guarantees to RoyNat.

McCallum took no part in the actual operation of the businesses but was invited to come to the meetings. This witness described the business in 1981 and 1982 as being very rough. Subsequently RoyNat was bought out when the operating company had received financing through the Small Business Development Corporation to the extent of $600,000. Heading further guaranteed $65,000 on the line of credit with the Royal Bank. Mr. MacDonald did not do likewise. Heading was required to sign a Postponement of Claim but the Appellant did not do so because at that time he did not have any investment in these companies except his initial share purchase for $10,000.

In order to obtain funds to continue operation, Cape Breton Holdings (1984) Limited sold one of its properties to Hammox Holdings Limited but was required to take back a mortgage for $125,000. This was the same mortgage which was later purchased from the receiver by McCallum for $25,000 but this sale was not questioned by any party.

Initially, this witness said that by January 1993, he called the Provincial Tax Commission and advised them that he could not make remittances of provincial tax. Further he told Revenue Canada that he could not make remittances of GST until the summer operating season had commenced and Revenue Canada agreed to accept remittances later on. However, Revenue Canada seized a line of credit at the bank for $34,000. The directors met to discuss the problem, the Small Business Development Corporation would not advance any more money, none of the directors would put in more money and so ultimately Cape Breton Holdings (1984) Limited went into bankruptcy. The whole process took about four days.

This witness further testified that earlier arrangements for making GST payments in arrears were accepted by Revenue Canada. He had some difficulty when he learned of the total amount of the GST and income tax claims believing that they were only $35,000 and that he would be able to handle it. However, in Court he did not question to any extent the accuracy of the claims in issue. The records were destroyed after the bankruptcy by consent of the company and the receiver. The bank accounts were garnisheed by Revenue Canada. After that he paid nothing on the GST claim. Subsequently he declared bankruptcy and was also assessed for the outstanding amounts in issue.

In cross-examination he said that financial statements were discussed at the annual meetings of the company. These were unaudited statements prepared by the accountants. He was briefed on the financial statements in ad- vance of the meeting since he was running the operations and normally no other directors were present at that meeting. He then presented the information at the annual meetings. Sometimes the accountants came to meetings to explain certain financial matters. The Appellant would be at the meetings of the company. He was aware of the financial position of the companies so far as this witness was concerned. Annual meetings and special meetings were held when the company was involved in some financial matter. Whenever this witness met with Scotchie he passed on to the other directors the nature of the discussion. Either himself or Scotchie would call the Appellant especially if it involved construction because he had business experience behind him.

He confirmed that the Appellant was the president of Cape Breton Holdings (1984) Limited although the presidency went back and forth, and that he attended annual meetings. He further confirmed that the Appellant was a shareholder in Vista Motels Limited and that the Appellant had cheque signing authority in 1983 for Vista Motels Limited although only one signature was required. Cape Breton Holdings Limited normally did not have a chequing account and it was used only for transfer purposes.

He confirmed that Island Inns Limited bought the original Cape Bretoner Motel on October 4, 1982 and that the Appellant, himself and their two wives were the owners. The Appellant was not involved in the day-to- day operations. The Appellant was one of the directors and reviewed the financial statements. There were approximately 35 employees at the motel and the Appellant was aware of the fact that remittances had to be made to Revenue Canada because of the Appellant’s business experience. Cape Breton Holdings (1984) Limited was never behind in its taxes in the early 19908. Problems did not develop in this regard until the winter of 1991, 1992 and 1993. He said: “I do not think I would have told the Appellant about the arrears in 1991 and 1992 but in 1992 and 1993 they might have had a meeting. At that time he would have told the Appellant but he could not be certain.

At the annual meetings the topic of arrears of taxes would have been discussed. From 1987 on, problems facing the business were brought up and discussed at the annual meetings. He had a discussion with someone at Revenue Canada about outstanding remittances and this person agreed to wait until the summer season of 1993 when they would be paid. He could not remember who this was. This discussion took place in January 1993 and centred around remittances for PST and GST but not income tax. At that time, representatives for Revenue Canada were coming in to the motel monthly to verify these remittances. He did not mention these discussions with the directors because he had made arrangements. By 1993 the company had gone out of business. He admitted that there were arrears of GST for 1991 and 1992.

He then said: “I doubt if I brought up arrears with him (the Appellant) because it was being handled”. At this point in his evidence he was asked about 1991 and 1992. He said that he did not know about those years. The Appellant could have obtained any books and records of the company that he wanted to but the Appellant did not wish to do so. At the last meeting of the directors in 1992 the financial situation of the company was discussed and the Appellant would have been aware of it. The Appellant did not resign as a director, was still a shareholder at the time of bankruptcy and he did not inquire about the remittances. The last meeting was held in April 1993. Any correspondence between the company’s solicitors and the company’s accountants would have been discussed at the annual meetings. He would not hold back any information from the directors.

In re-direct he said that he basically advised the other directors about the operation when problems arose. The Appellant had confidence in him and allowed him to run the business. At the time of bankruptcy all the shareholders agreed that bankruptcy was the proper way to go and Mr. Doug Giannou of the Small Business Development Corporation agreed with this position. “The end of 1992 was not that bad but it was going into 1993 when major problems occurred”. The arrears for 1991 and 1992 were not a problem because they did not become manifest until the bankruptcy had taken place.

G. Wayne Beaton was a barrister and solicitor of the Supreme Court of Nova Scotia and was the solicitor for Cape Breton Holdings (1984) Limited. He had been involved with Cape Breton Holdings (1984) Limited and its predecessor since the 1980s and up to 1991 and 1992. He dealt mostly with Gordon Heading and said that he had not received any instructions from the Appellant. He did admit that he took the affidavit of the Appellant for the debenture with the Small Business Development Corporation and that he may have had other dealings with him through Heading although Gordon Heading was considered by him to be “the point man”. He talked to Jim MacDonald (the Appellant) on the telephone regarding the possible bankrupty of the operating company and they agreed that that was the way to proceed. His firm was not on a general retainer with the company but was there for special matters only.

Gregory John MacKenzie was a chartered accountant and was the trustee involved in the bankruptcy of Cape Breton Holdings (1984) Limited. He met with Mr. Heading to take control of the premises and there was no resistance. Heading was retained by him to act as manager until the sale took place in about six months. He did not know whether they scrutinized the claims of Revenue Canada or not although normally “a close out audit” is done for income tax and unemployment insurance deductions but not for GST. He did not file any objections to the claims of Revenue Canada. No claims for priority were asserted by Revenue Canada. He confirmed that the $25,000 bid from Mr. McCallum was accepted for the receivable of Ham- mox Holdings Limited. Revenue Canada may not have been aware of this transaction. He could not recall talking to the Appellant.

He confirmed that Mr. Gordon Heading is presently in personal bankruptcy and this witness is still involved. By the time the bankruptcy is completed there may be approximately $500 to go to Revenue Canada against these claims. In cross-examination he stated that he had no reason to dispute the figures of Revenue Canada with respect to their claims.

The Appellant James G. MacDonald indicated that he was now retired. He is 72 years of age. He had been involved in construction work since thirteen years of age. In 1964 he started a company called Island Construction. He was educated in pre-engineering and took one year at the university of New Brunswick Engineering School. He was initiated into the motel business through “Scotchie”. He said that the Vista Motel was his first involvement. He was involved in the construction of this motel as well.

He only received one dividend for all the years that he was involved in the motel business. He was never involved in the day-to-day operation or management of the businesses. He may have had cheque signing authority and he may have signed one cheque. It was his position that Scotchie ran things until he became sick. When the Appellant was president he was president in name only.

He was never an employee of Vista or Wandlyn. As far as he was concerned he saw his investment in the motel business as a part of his retirement. He confirmed that he had one share in Vista Motel Limited 1973 and that he participated in the annual meetings. Otherwise he participated in meetings on special occasions such as at times of construction or planning and at the time of the construction of the second floor on the Vista Motel. He bought shares in Cape Breton Holdings (1984) Limited and apart from that had nothing to do with the company.

In 1982, he became involved with the Cape Bretoner Motel. He went in with Gordon Heading. He put in only $2,500 into Island Inns and not $10,000 as had been indicated by Heading. He was involved in construction only and Scotchie was in the background. In 1984 he was not asked to put more money into the business to cover taxes but he was told by Heading that Scotchie had put in $130,000. His position was that he was not involved in the amalgamation agreements, that Scotchie ran the business and that he made the decision about the amalgamation. Heading would call him to come in and sign documents or he would be told to go to the lawyers office to do likewise. He did not have much to do with the amalgamation and afterwards he was not involved to any great extent. He was unable to advise anybody as to financing because that was not his expertise.

In the late 1980s the directors received an updating of the financial position of the company and an annual meeting was held. He was probably told about the financing by Heading and he confirmed that he had signed the guarantee for $50,000. He could not say if he was ever a shareholder of Cape Breton Holdings (1984) Limited but he was a shareholder in Vista Motels. He was not involved in the negotiation with ACOA except that he was aware of the work put into the matter by Heading and he presented some proposals to him for the work. This Appellant was not in favour of constructing a pool but Best Western had said that it was necessary to get a four star rating and he went along with it because of the other directors.

He also admitted that he was aware of Heading’s concerns regarding the competition. He was told about the investment of Acorn into the business, more money was needed and Heading told him that an adventure company might be found. The Appellant had no dealings with Mr. McCallum on behalf of the adventure company although he met him at meetings. He was aware of the guarantee that he had signed for RoyNat. He was unaware of any offer made for some of the company’s property as Heading ran things.

In 1991 he was not around the business very much because of his illness. He was still active to some extent in project management. He was agreeable to the Small Business Development Corporation financing because the debt would be less than the company had before and his guarantee would disappear. He did not sign any postponement of claim because he had no other money invested in the company except his share capital. He only signed the RoyNat guarantees and did not sign on the guarantee for the operating line of credit with the Royal Bank.

He was aware of the sale to Hammox. He signed the deed to complete the transaction. He also agreed to the company taking the mortgage back from Hammox. He also agreed to the assignment of the $125,000 amount to the Small Business Development Corporation which was received from the sale of the Vista property. He did not object to Gordon Heading running the business and he had full confidence in his abilities.

With respect to the bankruptcy proceedings in 1993, he was advised by Gordon Heading who telephoned him. He then had a meeting and it was O.K.’d by the directors.

Initially, he said that he was unaware of any outstanding remittances to Revenue Canada until the bankruptcy took place. However, he did admit that he had been aware of the fact that Gordon Heading had made arrangements with Revenue Canada in the previous year (1991) to pay arrears of remittances and he was of the opinion that it was being looked after.

He did say that he had heard about the requirement of “due diligence” at a meeting in Halifax before these problems arose because it was being discussed there with a lawyer. However, he did not think that it applied to them.

He was assessed for GST and income tax remittances that had not been made by Cape Breton Holdings (1984) Limited and he appealed them. He is unaware of the amounts or whether or not they are correct.

He was asked by counsel what he would have done if he had known about the arrears and he said that he would never have become a director of a company. He had not received any of the amount which was withheld from Revenue Canada. He was aware that Gordon Heading had been assessed for the same amounts but he did not talk to Mary MacDonald or Scotchie MacDonald about them.

Gordon Heading had never received his permission to pay suppliers and not Revenue Canada. “Gordie always made the decision as to who to pay. If I am found responsible, I will have to declare bankruptcy.”

In cross-examination the Appellant admitted that he had been a director of Cape Breton Holdings (1984) Limited for some years, possibly since 1974. He admitted that financial matters were discussed at the annual meetings and that the small business development corporation loan was discussed. After looking at the documentation he was satisfied that he was still President of the company on May 26, 1981 and would have reviewed financial statements. Further to the 1983 annual meetings, various matters were discussed including a possible name change. He was a shareholder in Island Inns and he had an interest in the different companies involved in this matter. Sometimes he was President and sometimes he was not.

As far as he was concerned the motels never did as well as he had expected. The number of motel rooms in the area increased sharply in the late 1980s. He made no inquiries as to whether the taxes were being paid or not. There was no sign that they were not being paid. It was his position that Revenue Canada had renegued on an undertaking with Mr. Gordon Heading to pay the tax arrears in the summer time after the business had operated for the summer season. He said, “I knew that they were being paid late. Business was slow.” He admitted that he had never resigned as a director and that the Company records were available to him.

He was asked about his earlier business interest and he admitted that he had been involved with Island construction. He was the owner of Island Construction Limited until 1984 and this company sometimes had up to 200 employees. He was the President of that company and did every thing. Taxes were remitted for the employees. He knew that deductions had to be made-and GST had to be collected by Cape Breton Holdings (1984) Limited and remitted. There was never a profit from Cape Breton Holdings (1984) Limited.

In redirect, he said that he could not say if “Gordy Heading” had told him that Mr. McCallum had put $40,000 into the business or not.

Argument on behalf of the Appellant

Counsel for the Appellant took the position that there were two main arguments in this case:

1. Do the charging sections apply to the Appellant in this case due to his lack of control of the business?

2. Does the Appellant satisfy the due diligence tests?

Counsel referred to the case of Soper v. R. (1997), 97 D.T.C. 5407 (Fed. C.A.) on page 5416 and argued that if one considers that the upper level of liability for the director is ten, then taking into account the subjective element, as this case intends, the Appellant here should be considered to be no more than a two or three. It was obvious from the evidence that the Appellant relied almost intrinsically upon Mr. Gordon Heading to operate the business and relied upon him to make the requisite payments. It was not unreasonable for him to believe that matters were going to improve, consequently, he acted reasonably.

All of the negotiations with respect to the appropriate entities were conducted by Mr. Gordon Heading within his authority even up to the last few months that the company was in business. The Appellant had no knowledge of the problems that were existent or that were to become existent, taking into account his position in the operation of the company.

Counsel took some solace in the case of Johnstone v. Minister of National Revenue (1997), 97 D.T.C. 355 (T.C.C.) where Judge Teskey found in favour of the taxpayer where he had relied upon the company’s bookkeeper and accountant to make the necessary payments. It was not unreasonable for him to do so under those circumstances, the Appellant in that case being an “outside director”. Likewise in Stevenson Estate v. R. (1996), 97 D.T.C. 863 (T.C.C.), Judge Bowman allowed the appeal of an outside director on the basis that he was an elderly man of minimal education and would have no idea of what was going on with the company. He took no part in the financial affairs of the company and could not have influenced the course of events. He was not held to be personally responsible for decisions that he had no way of affecting.

Further, in Smith v. R. (1994), 94 D.T.C. 1716 (T.C.C.) where none of the “outside directors” possessed experience in relation to the daily financial management of the company, nor were they involved in the financial aspects of the corporation, relied upon the management team and the payroll deduction system that was in place, where there was no indication either at the Board meetings or in the weekly events reports prepared by the company’s chief executive officer, that any arrears were owing to Revenue Canada, the directors were not personally liable for the amounts owing since there was no reason why they could not rely upon the accuracy of the information provided in the financial reports.

In the present case, the Appellant lacked the ability to rectify any problem that existed during the latter stages of the operation prior to the bankruptcy. He had no cheque writing authority, he was not involved in paying the accounts. The fundamental cause of the breach was that there were too many rooms in the area brought on by the application of federal funds in the area which acted to the detriment of existing businesses.

Counsel asked the question, “why not assess Scotchie MacDonald and Mary MacDonald? They could have paid these accounts. Why was there no objection to the sale of a property of the operating company, valued at $125,000 which in the end was sold for only $35,000?”

Counsel referred to the Appellant in this case as a “passive director” as in the case of Robitaille v. The Queen, supra. Likewise in Sheremeta v. Minister of National Revenue, [1991] 1 C.T.C. 2593 (T.C.C.) where the Appellant was without control, could not have participated in the default or in the decision not to remit taxes, where she was only a titular director, did not exercise freedom of choice and she was held not to be liable. That case is applicable to the facts in the case at bar.

He took the position that the Appellant acted with the degree of care, diligence and skill that a reasonable person would have exercised in comparable circumstances, as in Champeval c. Ministre du Revenu national (1990), 90 D.T.C. 1291 (Eng.) (T.C.C.), and that section 227.1(3) relieves him of all personal liability, since in the circumstances a reasonable person would not have acted otherwise.

Likewise, as in Merson v. Minister of National Revenue ( 1988), 89 D.T.C. 22 (T.C.C.), it was proper for the Appellant here to rely upon a payroll deduction system that was tried and had not been shown likely to fail. Further, as in the case of Sanford v. R. (1995), 96 D.T.C. 1912 (T.C.C.) the Appellant here could not have done anything else. He should not be held liable when the remittances were not made since a reasonable person in his position would not have done otherwise.

Counsel further argued that in the event that the Court should find that the Appellant was liable for the unremitted amounts, then the Court should be in a position to apportion the unremitted amounts among the various directors so that the Appellant in this case should only be found liable for a portion of the unremitted amounts and not for the whole amount. The Appellant should not be responsible for penalties and interest in light of his actions and in light of the fact that he was such a small player in this business. He relied upon the provisions of 227.1(7) of the Income Tax Act and section 323(8) of the Excise Tax Act in this regard.

Further, counsel raised some issue with respect to the accuracy of the assessment itself and suggested the Court might find as owing a smaller amount than that which was assessed by the Minister.

Counsel argued that the appeal should be allowed and the Minister’s assessment should be varied or vacated.

Argument on behalf of the Respondent

Counsel for the Respondent argued that the duty in this case is on the Appellant under section 227.1(1) of the Income Tax Act since that section places the liability upon the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amounts in issue and that the directors are jointly and severally reliable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

The only defence open to the Appellant is that provided in 227.1(3) if the Appellant can show on the balance of probabilities that he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

Here the knowledge, skill, ability and experience of the Appellant must be taken into account. In the circumstances of this case, the Appellant did not act reasonably. There is a high standard of care upon the Appellant here due to the extent of his knowledge in business, the skill and expertise that he possessed and due to his ability. Applying these subjective elements to the Appellant it can be readily seen that he did not act reasonably.

The evidence showed that the Appellant was a director of Cape Breton Holdings (1984) Limited since 1973. He was also the President on occasion. He was informed about the financial statements at the company’s annual meetings. He ran his own company for a number of years, Island Construction Limited and had as many as 200 employees on the payroll. This Appellant knew that remittances had to be made from his business and also on behalf of Cape Breton Holdings (1984) Limited. He was not just a shareholder and a nominal director. He signed documents on behalf of the company, he was familiar with them, was instructed as to their contents and the effect of documents upon him was explained.

There was a free exchange of information among the directors. Mr. Gordon Heading testified that he passed on the information to the directors at the annual meeting. The Appellant had a say in the major decisions of the company. He signed documents. “He was brought up to speed. He was not kept in the dark.”

The Appellant displayed his participation in the decision-making of the company because at one point in time he disagreed with the remainder of the Board of directors with respect to building a swimming pool in the motel. He gave his opinion to the Board of directors and even though he was overruled, it is obvious that he had a chance to present his opinions. At that time, he was made aware of the financial requirements to build the pool. The cost picture was not attractive to him. He had a good knowledge of what was going on in the company. The decisions of the company were made as a team, not by one of the Board of directors. The property was sold, deeds were completed and the Appellant signed the deed. He could have resigned as a director at any time. He did not do so. The most he did was to offer his shares up to the other shareholders in accordance with the shareholder’s agreement but he continued to act as a director and officer of the company.

There was nothing to prevent the Appellant from making inquiries about the state of the remittances to Revenue Canada. He did not ask any questions about them. Books of the company were accessible to him. He could have found this out.

The Appellant was not a nominal director. On a scale of one to ten, he was not a three but was at least a seven or higher. A nominal director is almost in the dark about what is going on in the company. This Appellant does not fit into that category. The Appellant falls within the position of a director as discussed in Soper v. R., supra, at page 20 because he possessed a positive duty to act having obtained information or having become aware of facts which might lead him to conclude that there was, or could reasonably be a potential problem with remittances. What were these reasons for such a suspicion? In 1991, there was a problem with the remittances. In 1992, it was brought to his attention about this problem in that the remittances for 1992 and for 1993 would be in arrears. This is evidence that he was not an outside director, so that a greater duty was placed upon him than one who was not made aware of such a situation.

The Appellant was possessed of a general knowledge of the difficulties surrounding a number of businesses which had failed and was aware of the possibilities that this might happen to the business in which he was involved. This was as early as 1986. He knew that the company never made a profit since the amalgamation. A great deal of money had been invested into the company to keep it afloat and yet it was not doing well.

The reason why the company was able to continue on in business in 1992 and 1993 was because it used the money destined for Revenue Canada to pay its other bills. This was a conscious act on behalf of the company and the Appellant left that up to Gordon Heading. He cannot now claim that he did not do so at his own peril.

There was no documentation presented to the Court to substantiate the claim that arrangements had been made with Revenue Canada to allow the amounts to be paid in arrears, but in any event that would not be a defence to the Appellant.

Further, the Appellant found out about the arrears in 1991 and took no psteps to rectify the situation. He was also aware that there would be arrears in 1992 and 1993 and did nothing to ensure that remittances were made to Revenue Canada.

He knew early on that there many problems in the business. Others were putting money into the business in order to keep afloat. He should have taken positive steps to ensure that the remittances were made.

There were no secrets kept by Mr. Harding vis-à-vis the Appellant and yet he took no steps to rectify the situation.

In this case, there was not a management team in place such as an accountant or a bookkeeper who could reasonably have been expected to have made the remittances or to advise the Appellant that the remittances had not been made as in some of the cases. There was just a small group of directors who were running the business even though they may have delegated a substantial amount of authority to Mr. Gordon Heading. The Appellant cannot escape liability by saying that they delegated their authority to him.

The Appellant overheard the discussion in Halifax about due diligence matter. At that point in time he should have taken some steps to find out about what was required of a director. He did not do so.

With respect to the accuracy of the account, this amount has not been disputed. The Receiver could find nothing wrong with the account even though he may not have scrutinized it to any extent. He filed no objection to the claim. No evidence has been presented to even suggest that the claim was not valid.

With respect to the liability in this case under section 227.1, the liability is joint and section 227.1(7) does not entitle the Court to apportion the liability. All that section does is give a right to a director who has satisfied the claim to obtain a contribution from the other directors. That cannot be done by this Court. The Court has no jurisdiction to find that the amount owing by the Appellant is other than the full amount if it finds that he is liable under this section.

The appeal should be dismissed and the Minister’s assessment should be confirmed.

By way of reply, counsel for the Appellant said that Gordon Heading indicated in his evidence that internal matters were not brought before the other directors. The matter of the remittances was such an internal matter.

The Appellant here was an outside director as in Soper, supra and he was not made aware of any circumstance which would have required him to act otherwise.

Analysis and Decision

The Court will deal firstly with what it considers to be several peripheral issues raised by counsel for the Appellant in his written and oral argument.

Counsel for the Appellant argued that there is a real issue as to whether or not the Appellant was liable in relation to the provisions of subsection 227.1(1) of the Income Tax Act and/or subsection 323(1) of the Excise Tax Act because of his lack of control of or an involvement in the business of Cape Breton Holdings (1984) Limited (“the company”). The Court finds little merit in that submission. The provisions of subsection 227.1(1) make it clear that were the corporation has failed to make the necessary deductions and remittances as required, the directors of the corporation at the time that it was required to make and remit the deductions to Revenue Canada are jointly and severally liable together with the corporation to pay any such amount. The requirements under subsection 323(1) of the Excise Tax Act are identical. Consequently, where the amount is not deducted and remitted to Revenue Canada, all of the directors are liable for the amount whether they may be classified as inside directors, outside directors, titular directors, nominal directors or otherwise and immaterial of their participation in the day-to-day operations of the corporation.

There is no question in this case, based upon the evidence given, that at all relevant times, the Appellant was indeed a director of “the company” and no real issue was taken in that regard.

Consequently, the Appellant is caught by the provisions of subsection 227.1(1) unless he falls within the provisions of 227.1(3).

Counsel for the Appellant also raised the issue of contribution under subsection 227.1(7) of the Income Tax Act and under subsection 323(8) of the Excise Tax Act. The provisions are identical.

Counsel argued that as a result of these provisions, the Court is in a position to make a finding that the Appellant may be responsible for some of the unremitted amounts but could find that he is not responsible for the whole amount and that other directors who were assessed or unassessed might be responsible for a portion of the unremitted amounts. Further, because the Appellant played such an insignificant role in the operation of the "company" that the Court could find that he was not liable for penalties or interest.

The Court finds that there is no merit in this submission. The above referred to provisions appear to be unambiguous and the Court is satisfied that any right given to a director under these sections is a right of indemnity, that remedy cannot be pursued in this Court and it would be up to an Appellant who had to satisfy the claim to take action for contribution against one or more of the other directors.

Likewise, this Court concludes that if the Appellant is found to be liable for the unremitted amounts, then he is jointly and severally liable with the company and the other directors for the whole amounts. The penalties and interest follow therefrom and this section gives no jurisdiction to this Court to apportion the amount owing among the various directors nor to find that he is not liable for penalties and/or interest.

The Court now turns to the substantial issue in this appeal under the provisions of subsection 227.1(3) and the so called test of “due diligence”.

This Court has formerly held that the due diligence test is both a “subjective” test and an “objective” test. It is objective in the sense that there must be a standard against which to compare the actions or non-actions of the “director” in question in any given case. This test has to be the test of reasonableness, or to put it another way, the reasonable director test which would be something similar to the “reasonable man” test as often applied in civil actions. The test is also subjective in that it must take into account the particular situation of the director during the relevant period of time including such things as freedom of choice in decision-making, the knowledge of the individual director, the individual director’s experience in that company as well as other experiences in business, the director’s specific knowledge of the operation in question and the reason for any lack of knowledge on behalf of the director in question. See Sheremeta v. Minister of National Revenue, supra.

Consequently the Court is satisfied that when considering the due diligence test in relation to a director, all directors are not equal. This would appear to be the theme of the Federal Court of Appeal in Soper v. R., supra and particularly at page 5416 where it said:

This is a convenient place to summarize my findings in respect to subsection 227.1 (3) of the Income Tax Act which is inherently flexible. Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the direc- tor, as well as his or her corporate circumstances in the form of, inter alia, the company’s organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons).

Further, at page 5418, the Court makes it clear that there are different levels of directors, for it said:

Accordingly, an outside director cannot be required to go to the lengths outlined above.(Referring to the duties of a trustee). As an illustration, I would not expect an outside director, upon appointment to the board of one of Canada’s leading companies, to go directly to the comptroller’s office to inquire about withholdings and remittances. Obviously, if I would not expect such steps to be taken by the most sophisticated of business-persons, then I would certainly not expect such measures to be adopted by those with limited business acumen. This is not to suggest that a director can adopt an entirely passive approach but only that, 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....

In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances.

In the case at bar, counsel for the Appellant has argued that the Appellant was an “outside director” and that in acting the way that he did, he acted reasonably having regard to the requirements above-referred to.

In the case at bar, the Court does not accept the argument of counsel for the Appellant that James G. MacDonald was an outside director “as referred to in Soper v. R., FCA A-129-95, supra.

However, whether the Appellant was an inside director or an outside director that does not end the matter, but it is only a starting point as indicated by Mr. Justice Robertson in Soper, supra. If a person is an inside director as opposed to an outside director that does not mean that he should be automatically held liable when the remittances are not made. Indeed many cases have refused to impose liability on such persons where the person is an innocent party, has been mislead, been deceived by others, where information has been withheld from him and where it would be unreasonable to expect that the director in question could have acted otherwise than as he did. Thus, it is possible for an inside director to be exonerated from liability in an appropriate case.

Further, it is not necessary that a director, to be exonerated, must be able to establish that he took positive steps to prevent the non-collection or the non-remittance. As suggested by Mr. Justice Robertson at page 5418 of the Soper case, supra, where he said, “while such precautionary measures may be regarded as persuasive evidence of due diligence on the part of a director, in my view, those steps are not necessary conditions precedent to be established in that defence”. Later on in the decision he was clear to point out that, “this is not to suggest that a director can adopt an entirely passive approach but only that, 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 their obligation such as those owing to Her Majesty.”

It is a convenient point of beginning in this analysis to determine in which category the Appellant should be placed. This Court is satisfied on the basis of the evidence that the Appellant was not a so-called “outside director” but he was much more than that. He was an experienced businessman, had substantial knowledge in business matters, he ran his own company, he was familiar with the requirement to make remittances to Revenue Canada for employees for income tax, GST and unemployment insurance. He operated his own company for a number of years and had a considerable number of employees. Further, he was aware of the fact that the operating company in question here had a number of employees and was also aware of the fact that remittances had to be made on their behalf.

The Appellant was not merely a “passive director” in his actions with this operating company from its inception. He was at times the President of the company, had an opportunity to review and did review financial statements almost annually, had an opportunity to discuss financial matters with the company’s lawyer, with Mr. Heading, Scotchie MacDonald and with others almost from the beginning. He took part in discussions with respect to the direction that the company should take in the 19908. He was aware of the discussions regarding the financial problems that were existent or which would surely exist in the near future with respect to the over abundance of motel rooms in the Sydney area and that the “company” surely would have financial difficulties in the future.

Indeed, it had difficulties in the past. He was a party to various financing arrangements including signing of guaranties or was aware of the fact that money had been put into the company on a number of occasions by different people to keep the company going. He had some considerable knowledge of financial matters and indeed had concluded that it was not a good business decision for the company to proceed with the building of a pool on the motel property and was against this. However, the Board of directors had its way and in the end result the Appellant did not resign but continued to be associated with the company in the same way he had been in the past.

As early as 1991 and up to the time of the bankruptcy of the “company” the Appellant had been aware of the fact that there had been some difficulty in the company meeting its commitments to Revenue Canada in that they had not made all remittances on time in 1991 in spite of the fact that some arrangements had apparently been made by Gordon Heading with Revenue Canada to give some leeway as to when these remittances should be made. In the year 1992 the Appellant was advised that arrangements had been made with Revenue Canada to allow late remittance. The Appellant was also aware about the issue of due diligence from discussions he heard in Halifax although one could not have expected him to understand this concept completely. In any event, in light of all of the above, the Appellant could certainly not be considered to be anything other than “an inside director” possessed of considerable skill, knowledge and business acumen not only in a general way but also specifically relating to the operations of “the company”.

Under these circumstances, the Court is satisfied that the Appellant in this case was similar to the director in the case of Stevenson Estate v. R. (1996), [1997] 1 C.T.C. 2740 (T.C.C.) where Bowman, J.T.C.C. held that the inside director was liable for a failure to meet the standard clearly set out in subsection 227.1(3) of the Act and, in doing so noted that the “director” was involved in the company’s affairs to a degree that she could not have been oblivious to its financial difficulties.

In the case at bar, the Court finds that the Appellant had reason to have suspicion with respect to the remittances. There was no reason for him to conclude that there was a regime in place that would ensure that these remittances were made or that Gordon Heading would make the remittances to Revenue Canada rather than pay other operating accounts which he obviously did. As far as the Court is concerned, the Appellant as early as 1991 was under a positive duty to act because he had obtained information or had become aware of facts which would lead any reasonable director to conclude that there was or could reasonably be potential problems with remittances.

It is true that the Appellant relied intrinsically upon Gordon Heading to do what was necessary and relied upon his integrity but in doing so he was adopting an entirely passive approach. There was reason for suspicion. It should have become clear to him that he was no longer able to rely on any day-to-day Corporate Manager to see to the payment of this debt obligation to Her Majesty the Queen.

Under the circumstances, the Court is satisfied that the Appellant has failed to meet the burden upon him of establishing that he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would exercise in comparable circumstances as required under section 227.1(3).

This Court is not unmindful of the considerable financial effects which this decision may have upon the Appellant in this case and it has considerable sympathy for his position and plight. But this Court is unable to decide the case on the basis of sympathy. It must be decided on the basis of the facts established, in light of the provisions in the Statutes and the interpretation of those provisions by the Courts.

The appeals are dismissed and the Minister’s assessments are confirmed, with costs to the Respondent, to be taxed or agreed upon.

Appeal dismissed.