Blackwood v. R., [1998] 2 C.T.C. 2631

Rip T.C.J.:

1 Jeff Blackwood has appealed assessments issued pursuant to sections 227 and 227.1 of the Income Tax Act and section 323 of Part IX of the Excise Tax Act. Subsection 227.1(1) of the Income Tax Act and subsection 323(1) of the Excise Tax Act provide, among other things, that where a corporation fails to remit source deductions or net tax required to be made under the relevant statute, the directors of the corporation at the time the corporation was required to deduct and remit the source deductions and remit the amount of net tax are jointly and severely liable, together with the corporation, to pay such amounts and any interest or penalties relating to those amounts.

2 Mr. Blackwood was a director of H.E.B.B. Publications Inc. (“H.E.B.B.” or “corporation”) from October 2, 1991 to February 22, 1994. During this period the corporation failed to remit to the Receiver General for Canada federal income tax withheld from the wages paid to its employees in 1992 in the amount of $1,046.46 and during 1993, $2,874.24. The corporation also failed to pay interest relating to the unremitted federal tax in the amounts of $815.30 and $2,860.86 respectively. The corporation failed to remit to the Receiver General the net Goods and Services Tax (“GST”) collected as follows:

Oct. 1 to Dec. 31, 1991	$2,406.79
Jan. 1 to Mar. 31, 1992	789.18
Apr. 1 to Jun. 30, 1992	2,415.85
Jul 1 to Sept. 30, 1992	1,122.34
Oct. 1 to Dec. 31, 1992	2,259.27
Jan. 1 to Mar. 30, 1993	79.43
Apr. 1 to Jun. 30, 1993	2,099.58
Jul. 1 to Sept. 30, 1993	1,126.58
Oct. 1 to Dec. 31, 1993	1,266.50
Jan. 1 to Feb. 22, 1994	134.10
Total	13,699.62

3 Penalties and interest failed to be paid by the corporation relating to the unpaid GST were in the amounts of $3,045.97 and $3,034.35 respectively.

4 The appeals from assessments pursuant to the two statutes were heard on common evidence.

5 Mr. Blackwood testified that he is not liable for the failure of the corporation for failing to deduct and remit source deductions and net tax since he exercised a degree of care, diligence and skill to prevent the failures that a reasonably prudent person would have exercised in comparable circumstances: subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise Tax Act.

6 Prior to 1991 Mr. Blackwood carried on a business as a sole proprietor under the name Jeff Blackwood & Associates. His son assisted him in preparing financial books of the business and in collecting accounts receivable. Some time in early 1991 he and his cousin, Dwight Blackwood, were approached by a Mrs. Lillian Hayes to carry on a business of publishing a local newspaper for the city of Mount Pearl in Newfoundland. They agreed to join Mrs. Hayes in the venture and incorporated H.E.B.B. to carry on the business. Mr. Blackwood stressed that since he already carried on his own business he wanted a “minimal involvement” in H.E.B.B. His priority was his own business.

7 Dwight Blackwood was the chief executive officer of H.E.B.B. and was also responsible for all financial matters. Mrs. Hayes and the appellant were each vice-president; Mrs. Hayes was responsible for sales and advertising. All three were directors.

8 Before the corporation commenced carrying business rental space was acquired in Mount Pearl and part of the office space was sub-leased to the appellant's business, Jeff Blackwood & Associates. The corporation and Jeff Blackwood & Associates also shared secretarial expenses.

9 The first issue of the paper to be published by H.E.B.B. was printed in March 1991. Sales revenue did not meet anticipated levels and in mid-May Mrs. Hayes asked for a meeting to notify the two Blackwoods that she was resigning. Since no one was available to handle sales, the appellant, notwithstanding the commitment to his own business, volunteered to work Saturdays and did so for the next 50 Saturdays with little or no remuneration. In the meantime Dwight Blackwood obtained additional financing through Euracan Investments Limited (“Euracan”), a company which he and his brother-in-law were the shareholders.

10 Mr. Blackwood recalled that he was working six days a week in 1991 and eventually became ill with cardiac arrhythmia and hypertension.

11 Dwight Blackwood was busy with other business ventures outside of Canada and frequently travelled. He would leave his signature on cheques so that Jeff Blackwood would be able to pay debts as and when they became due. (The appellant did the same when he would be away.) Jeff Blackwood indicated that in such circumstances he always made payments as and when required to Revenue Canada.

12 The appellant stated that he was unaware of any financial difficulty with the corporation. He stated that at the time Dwight Blackwood was also studying to become an accountant, a chartered accountant according to the appellant, and all financial matters were Dwight Blackwood's responsibility.

13 In April 1993, the appellant stated that he received a telephone call from a Revenue Canada employee advising him that H.E.B.B.'s source deductions account was in arrears. This employee also informed him that his discussions with Dwight Blackwood were not accomplishing anything. Revenue Canada intended to garnish H.E.B.B.'s accounts. Jeff Blackwood stated that this was the first time he was aware that the corporation had problems with Revenue Canada. He advised the employee that he would speak to Dwight Blackwood as soon as possible. He stated that he went to Dwight Blackwood's office to voice his concern. The Blackwoods attended at the office of Revenue Canada and made arrangements to pay arrears for 1993. Upon return to H.E.B.B.'s office, the appellant said, he told Dwight Blackwood that Revenue Canada was to be the first person to get paid, even before the telephone company and other creditors. The appellant stated that he would rather close the business than not pay Revenue Canada.

14 Mr. Blackwood stated that he told Dwight Blackwood that he wanted the company's books brought up-to-date; indeed, he wanted an audit of the source deductions and he asked Dwight Blackwood to arrange for Revenue Canada to audit the books. When Dwight Blackwood advised him in April 1993 that the corporation had no money to remit to Revenue Canada, Mr. Blackwood wrote a cheque to Revenue Canada from his personal bank account. Subsequently, he stated, he tried to make sure that Revenue Canada would be paid on a timely basis.

15 The Blackwoods then met every week and, the appellant testified, he was advised “everything is fine”. Euracan was keeping the corporation afloat. He also stated that he asked Dwight Blackwood whether there were any problems with creditors and he was advised that there were none.

16 In fact, the appellant explained, H.E.B.B. had very few creditors. A publisher's creditors are, basically, the phone company, salaries paid to employees and printing costs. The largest account payable would be to the printer.

17 Jeff Blackwood also testified that the books of account of Jeff Blackwood & Associates were in “immaculate condition” and he had no problem with Revenue Canada.

18 During the summer of 1993 Dwight Blackwood advised the appellant that H.E.B.B. was suffering from a cash-flow problem. Apparently an employee of H.E.B.B. had defrauded it of approximately $25,000.

19 Sometime around October 1993 the appellant received a phone call from one Bill Ryan, a Collection Enforcement Officer with Revenue Canada's GST Section. He informed the appellant that H.E.B.B. had not filed any GST returns and he was receiving no cooperation from Dwight Blackwood. The appellant stated that he spoke to Dwight Blackwood and the latter undertook to file GST returns “within a week or so”. The appellant said he “followed it up” with Dwight Blackwood and the latter assured him “all was okay and there is nothing to worry about”. The corporation's financial position had not improved but there was sufficient cash on hand to meet its obligations.

20 Finally, one day in February 1994, just as the paper was to go to press, the printer advised that paper would not be published unless the printer was paid. The appellant wrote a cheque for the amount owing to the printer and the paper was published.

21 Several hours later Dwight Blackwood advised the appellant that as president of Euracan, Dwight Blackwood and the other director, his brother-in-law, Mr. Martens, had decided to call the loan to H.E.B.B.. Euracan seized H.E.B.B.'s assets. Euracan also called on the appellant to honour his personal guarantee on the loan to H.E.B.B. in the amount of $10,000, and the appellant paid. Mr. Jeff Blackwood stayed on at the premises because he had “no choice”; he paid all the rent and expenses he had previously shared with H.E.B.B..

22 About three weeks later, in March 1994, the appellant phoned Dwight Blackwood to confirm that the January 1994 source deduction remittances had been paid to Revenue Canada. Dwight Blackwood told him it had but there was really nothing to worry about since Revenue Canada had seized the accounts receivable of H.E.B.B. The amounts receivable were approximately $27,000 which, according to Dwight Blackwood, was more than enough to pay any amount owing to Revenue Canada for source deductions and GST.

23 In cross-examination, the appellant testified that very few financial statements were produced by H.E.B.B. and, in any event, he cannot read financial statements. He said the first time he realized there was a cash-flow problem was in April 1993. He stated he was unaware that H.E.B.B. had defaulted in making payments of source deductions to Revenue Canada in 1991 and 1992.

24 Mr. Bill Ryan testified on behalf of the respondent. He stated that in March 1992 he spoke to Jeff Blackwood on the telephone and proposed that post-dated cheques be delivered by H.E.B.B. to Revenue Canada for arrears up to March 10, 1992. He stated he also spoke to Jeff Blackwood on April 2, 1992. At the time Jeff Blackwood said that Dwight Blackwood had just returned to St. John's and that the latter Blackwood would be in touch with Mr. Ryan shortly. Dwight Blackwood did not get in touch with Mr. Ryan and Revenue Canada issued a “requirement to pay” on April 14, 1992. Dwight Blackwood then contacted Mr. Ryan and advised him money in the bank was required for payroll and other obligations; he asked if H.E.B.B. could give post-dated cheques for the three months it was in default. Revenue Canada accepted his proposal. On or about February 23, 1994 Mr. Ryan was advised that H.E.B.B. ceased operations. The appellant stated that he did not recall the earlier telephone conversations with Mr. Ryan. He indicated that there are three Blackwoods involved, himself, Dwight Blackwood and the appellant's son, and perhaps there were cases of mistaken identity in telephone conversations.

25 Mr. Keith Rees, also a Collection Enforcement Officer with Revenue Canada, testified that the appellant has been assessed with respect to the failure of H.E.B.B. to remit source deductions for the period up to May 25, 1993 in the amount of $8,551.18.

26 Since Jeff Blackwood has been assessed for H.E.B.B.'s failures to remit or pay before May 25, 1993, I must examine whether before that date he exercised a degree of care, diligence and skill to prevent the failures that a reasonably prudent person would have exercised in comparable circumstances.

27 The facts are that Jeff Blackwood's interest in H.E.B.B. was secondary to his interest in his own business. His own business, it is fair to say, provided him with a livelihood and it was to this business that he devoted his full time and attention. Dwight Blackwood is Jeff Blackwood's cousin. He was also studying to become a chartered accountant. A company in which Mr. Dwight Blackwood had an interest was financing H.E.B.B. Dwight Blackwood was responsible for the day-to-day affairs of H.E.B.B.'s business, including the accounts payable. There is no evidence of past rancour between the two Blackwoods nor is there any evidence or suggestion that Dwight Blackwood was incompetent or untrustworthy.

28 Also, Jeff Blackwood was in constant touch with Dwight Blackwood during the period under review. The appellant shared office accommodations with H.E.B.B.. He was never informed that H.E.B.B. was in financial difficulty until after the failures by H.E.B.B.. The appellant was also seriously ill for a time during this period.

29 In the circumstances, it is not unreasonable that the appellant should have had a high degree of confidence in Dwight Blackwood's ability to operate H.E.B.B.'s business. In some respects, the appellant could be considered to be an outside director. Jeff Blackwood exercised a degree of care, diligence and skill to prevent the failures to remit source deductions and pay net tax under the Income Tax Act and Excise Tax Act, respectively, that a reasonably prudent person would have exercised in comparable circumstances. As such, the appellant is not liable for H.E.B.B.'s failures under these statutes. The appeals are allowed with costs, if any, and the assessments are vacated.