Sackett v. R., [1998] 2 C.T.C. 2306

Lamarre Proulx T.C.J.:

1 These appeals were heard on common evidence. The Appellants were assessed pursuant to section 227.1 of the Income Tax Act (the “Act”) for deductions at source not having been paid by Uni-Therm Limited, (the “Corporation”), from October 1992 to December 1992 (the “relevant period”). The Appellants' position is that they never became directors of the Corporation. The position of the Minister of National Revenue (the “Minister”) is that they became directors as of October 21, 1992.

2 Both Appellants testified. There were no witnesses for the Respondent.

3 The Corporation, incorporated pursuant to the Business Corporations Act of Ontario, was in the business of mechanical contracting in air conditioning. The Appellant, Mr. Maika, is a sheet metal worker who began to work for the Corporation in 1982. Over time, Mr. Maika became trusted by his boss, the president of the Corporation, Mr. Raymond Reed. Mr. Maika became more and more involved in the management of day-to-day operation of the Corporation.

4 The other Appellant, Mr. Sackett, who is now a sales representative, began to work for the Corporation some time in 1992 as a welder helper. He stayed with it for a period of 18 months.

5 Both Appellants were paid on an hourly basis at the beginning of their employment with the Corporation. During the relevant period, they were paid on a weekly basis.

6 In the early 1990's, Mr. Reed expressed the desire to leave the Corporation whose business was apparently failing. He approached the Appellants with the idea to possibly purchase it. Mr. Sackett and Mr. Maika had some discussions together as to whether they should continue the business and they decided to do so as there was no other work available at that time. The Appellants stated however that, in their view, they never had the authority to manage the Corporation's business because they had never paid Mr. Reed any money for shares. They insisted that they were only in a managerial position and tried to the best of their ability to ensure that the suppliers were paid.

7 Exhibit A-1 consists, among other things, of a Notice of Change to the Companies Branch of the Ministry of Consumer and Commercial Relations (Form 1, Corporations Information Act). This form is dated October 21, 1992 and signed by Mr. John Maika. Attached to the Notice are signed resolutions showing that, from October 21, 1992, the Appellants became the only directors and that Mr. Raymond S. Reed was no longer a director. Mr. David Sackett was appointed president and director and Mr. John Maika, secretary-treasurer, vice-president and director. In Exhibit A-1, there are also the transfer of one common share to each of the Appellants for the sum of $1.00 and the resignation of Mr. Reed as an officer and director of the Corporation.

8 The Appellants testified that they had signed the documents that are part of Exhibit A-1 but that they had asked that these documents be kept in escrow until they were ready to proceed to the purchase. The Appellants stated that these documents were sent without their permission, either by Mr. Reed or by the corporate lawyer following Mr. Reed's instructions. The Appellants said that they never had in their possession the company's books, as they remained in Mr. Reed's possession, and that no meetings of the corporate board were held to which they were convened.

9 Exhibit R-2 is a bank document, dated October 20, 1992, one day earlier than Exhibit A-1 above mentioned. This document showed the signing authority of three persons individually, being Mr. Raymond S. Reed, president, Mr. David Sackett, vice-president and Mr. John Maika, secretary. Any one of them were allowed to sign the cheques. The Appellants did not contest this document. They agreed that they had authority to sign cheques. Indeed, a supplier was paid by a cheque signed by one of the Appellants as shown in Exhibit R-3. This exhibit is dated November 2, 1992. It is signed solely by Mr. Sackett. Mr. Maika had signing authority for some time, as in time, as previously mentioned, he began to be involved in the business management: finding clients, collecting the receivables and paying the suppliers. For Mr. Maika, he only carried on what he had been doing the previous years, i.e. as he said, obtaining the contracts and doing everything.

10 Exhibit R-4 is a claim for a lien made after January 7, 1993, by Uni-Therm Limited. The names of the owners are shown as David Sackett and John Maika. The document is signed by Mr. Sackett. The time within which services or materials were supplied was from October 31, 1991 to January 7, 1993. The contract price was $96,000 plus GST. Mr. Sackett was asked why he completed the claim in such a manner if indeed he had not considered himself the head of the business. He explained that the two Appellants were very involved in the operational aspect of the company and wanted it to remain afloat because Mr. Reed had lost interest in it and in that situation they had to act promptly.

11 Exhibit A-2 is a letter dated January 12, 1994, from Mr. Maika's lawyer at that time, which was addressed to another lawyer. This letter was produced to confirm the Appellants' position that the signed documents should have been kept in escrow:

Dear...:

Re: Uni-Therm Ltd.

Further to your recent correspondence, I can advise as follows.

• My clients had discussions at ...'s office concerning the possible purchase of the Uni-Therm business. I understand from my previous conversation with ... that certain documents were prepared in contemplation of that transaction. While it may be that some documents were signed by my clients at ...'s office, this was done in contemplation of the purchase transaction, which was not proceeded with as information concerning the liabilities of the company was not forthcoming to my clients. It is my client's understanding that any documents that were signed were to remain in ...'s office and were not to be released. This is consistent with my previous conversation with..., who advised me that if the transaction had proceeded, he would have sent my clients out of his office for independent representation.

• Therefore, it is my client's position that any documents that were signed were to be held in escrow, and that the release of these documents, including the filing of any Notice of Change with the Ministry of Consumer and Commercial Relations, amounted to a breach of escrow. Accordingly, any consents executed by my clients are ineffective to render them directors of the company.

• Yours very truly,

12 Exhibit R-7 is a draft purchase agreement dated October 21, 1992, that says that Mr. Raymond S. Reed is the owner of the Corporation. The shares and the goodwill would have been sold for an amount of $55,000, of which $30,625 was for the goodwill and the name of the company. Exhibit R-8 is a draft agreement dated October 29, 1992, that says that Mr. Reed is the sole owner of Uni-Therm Limited and that the Appellants, as directors and shareholders of the company, agree to hire Mr. Reed for a period of five years, with a yearly salary of $52,000 and that Mr. Reed will be the party who will solely decide what his duties are and how they are to be performed and what time is necessary for him to attend to the business. These documents were never signed, so the Appellants never acquired the ownership of the business.

13 A Mrs. Margaret Peacock was the Corporation's bookkeeper. At the beginning, she was employed full-time and then towards the end, she became a part-time employee coming approximately twice a week. During the relevant period, according to the Appellants, she would have received instructions from the three of them, including Mr. Reed, because he was still her boss. The Appellants testified that they never verified if the source deductions were paid, and they do not recall that she mentioned that aspect to them. They were preoccupied with the payment of the suppliers and the collection of the receivables.

14 Their testimony was that from October 1992 there were no employees, except may be themselves, and that very seldom, from the time they became the alleged directors, were they paid, although their salary may have accrued in the company's book. So it would tend to appear that the deductions at source at issue here may be those of the Appellants, although no specific evidence was made on that issue.

Analysis

15 The Appellants were evasive as to how the accounts were kept, as due diligence was not their means of defence. Their defence was that they had not become directors of the Corporation, because they had no money to purchase its business and that the signed documents appointing them directors were to be held in escrow. To further substantiate the fact that they had not in fact become directors, they said that they had not seen the Corporation's books and that there were no meetings of the corporate board. This is not proof that they had not accepted to be the directors of the Corporation. It is only a sign that they may not have exercised all the powers that they may have had as directors. Insofar as the argument consisting in tying the acceptance of becoming directors to the purchase of the Corporation's shares, it has to be noted that the purchase agreements, Exhibits R-7 and R-8, were not signed, whereas the documents pertaining to the appointment of the Appellants as directors were signed. There was no reason given for that difference. It should also be noted that unless the articles of a corporation otherwise provide, there is no requirement that a director must own a share of the corporation (subsection 118(2) of the Business Corporation Act of Ontario).

16 As of October 20, 1992, as per Exhibit R-2, the Appellants were officers of the Corporation and therefore did not have the statutory duties of directors. On October 21, 1992, Mr. Reed resigned from this function and the Appellants became directors of the Corporation.

17 The Appellants did not produce as evidence any document to the effect that the documents concerning their appointment as directors should be kept in escrow until some formal acceptance was given and no witnesses came to confirm this statement. This statement is in fact contradicted by their conduct in the management of the Corporation's business and also by their testimony that the former president of the Corporation wanted to forego the business if they were not to continue it on their own. Exhibit R-4, the claim for the lien, shows also that the Appellants considered themselves the only directors of the Corporation at that time.

18 The Appellants may have agreed to become directors mostly because they wanted to maintain a business for which they had worked hard, as well as to keep a source of income for themselves at a time when employment was scarce, although they may not have wanted the obligations attached by law to the function of directors. I cannot but find that the evidence shows that the Appellants have, in law and in fact, become the directors of the Corporation and are therefore subject to the obligations attached to this function. Since no defence other than the defence that they had not accepted to be directors was raised, the appeals are dismissed.