Lamarre Proulx T.C.J.:
1 This is an appeal from an assessment made under section 227(10) of the Income Tax Act (the “Act”) for an amount payable by the appellant under section 227.1 of the Act. On March 2, 1994, the Minister of National Revenue (the “Minister”) made an assessment against the appellant, in his quality as director of the corporation, Les Services Alimentaires Le Banquetier Inc. (the “corporation”), in the amount of $65,319.29.
2 Between March 1992 and May 1993, the corporation failed to remit to the Receiver General of Canada at the time prescribed by regulation the amounts withheld from employees' salaries as income tax as required by section 153 of the Act.
3 Subsection 227.1(1) of the Act stipulates that, in cases of failure to remit, the directors of the corporation are jointly and severally liable, together with the corporation, to pay the amount and any interest or penalties relating thereto. If the corporation has made an assignment under the Bankruptcy and Insolvency Act-- as is the case in this instance since the corporation declared bankruptcy on May 19, 1993 -- a director is not liable under subsection 227.1(1) of the Act unless the existence of the debt with respect to which it incurred the said liability is proved and claimed within six months after the date of the assignment in accordance with paragraph 227.1(2)(c) of the Act.
4 Subsection 227.1(3) of the Act provides for a defence against the liability set forth in subsection 227.1(1) thereof. A director is not liable for the failure where he has exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
5 At the start of the hearing, counsel for the appellant raised two preliminary points. The first point concerns the employer's share that must be added to the employee's contribution with respect to deductions at source required under the Unemployment Insurance Act. Counsel for the appellant wanted to include this point in the debate and pleaded that this share should not be included in the amount of the appellant's assessment. Notwithstanding the key fact that this point could not be raised at this late stage, there was the question of whether the appeal from the assessments made pursuant to the application of the Unemployment Insurance Act was validly filed before the Court. Subsection 54(2) of the Unemployment Insurance Act incorporates subsections 227.1(2) to (7) of the Income Tax Act. However, it is subsection 54(1) of the Unemployment Insurance Act which imposes liability on directors in the event of non-compliance with subsection 53(1) of that same Act. That subsection prescribes the withholding and remittance of the employee's premium payable by that insured person, as well as the employer's premium. Subsection 54(3) of the Unemployment Insurance Act stipulates that all of the provisions of Part III of that Act, which apply to the employer, also apply to the director of a corporation which failed to remit the premiums. Section 56 of the Unemployment Insurance Act defines the authority of the Minister to make an assessment. Subsection 61(2) of the Unemployment Insurance Act provides for an appeal for reconsideration of the assessment within 90 days of the assessment.
6 However, section 66 of the Unemployment Insurance Act specifically incorporates subsection 227(10) of the Income Tax Act. That provision applies to amounts payable after December 17, 1987. Not only does it define the Minister's authority to make assessments, especially with respect to unremitted source deductions, but it also provides for the application of Divisions I and J of Part I of the Income Tax Act. Sections I and J deal with assessments, objections to assessments and appeals to the Tax Court of Canada and to the Federal Court. It is likely that this provision represents the use of a legislative technique known as reference.[FN1: <p>In regard to the technique of reference, see the chapter on this topic in the work of Pierre-André Côté,<em>The Interpretation of Legislation in Canada</em>, 2nd Edition, Les Éditions Yvon Blais Inc., at pages 70 et seq.</p>] It would therefore appear that, in respect of the Unemployment Insurance Act, the Minister has two avenues open to him: either he proceeds under the Unemployment Insurance Act rendering his decision under subsection 61(6) of that Act (which would allow for an appeal under section 70 of the Unemployment Insurance Act) or he uses the authority conferred on him under section 66 of the Unemployment Insurance Act and proceeds with the assessment under section 227(10) of the Income Tax Act, which would enable the taxpayer to object or appeal under Divisions I and J of Part I of the Income Tax Act. It would therefore appear that the appellant's appeal under section 169 of the Act is a valid appeal from that portion of the assessment which concerns the amounts payable under the Unemployment Insurance Act. Consideration must also be given to the decision of the Federal Court of Appeal in Minister of National Revenue v. Reaume (1989), 89 D.T.C. 5091 (Fed. C.A.), in which the Court ruled that the assessment in respect of amounts payable under the Unemployment Insurance Act must be made under that Act. However, the application of section 66 of that Act was not raised, perhaps because it had not yet taken effect.
7 On the one hand, if the application, by reference, of the assessment and appeal procedure of the Income Tax Act in respect of the amounts payable under the Unemployment Insurance Act is in dispute, it merits legal debate, while on the other hand, and above all, since the question of whether the employer's premium should be included in the amounts assessed by the Minister was not raised until the morning of the hearing, it is not admissible as a point at issue.
8 The second point, that was raised at the outset and again during the hearing, concerns the accuracy of the claim made to the trustee in bankruptcy. Counsel for the respondent objected to this evidence because the issue was not raised in the Notice of Appeal. Counsel for the appellant explained that he only saw the documents a few days before the hearing. Counsel for the respondent informed the Court that counsel for the appellant had not made any examination for discovery of any of the Minister's officials and that, even without making such an examination for discovery, counsel for the appellant could have obtained a copy of these documents far enough ahead of time to have amended the Notice of Appeal within the time limits provided, and that with only two days notice, it was too late to raise a new point at issue.
9 The appellant, President and sole shareholder of the corporation, André Nadeau, trustee in bankruptcy, Mario Bergeron, the Minister's collection officer, and Sylvain Pagé, also a collection officer with the Minister, testified at the request of counsel for the appellant.
10 Messrs. Nadeau, Bergeron and Pagé were questioned concerning the claim made to the trustee, filed as Exhibit A-30. Counsel for the respondent objected to this document being entered in evidence because it was not on the appellant's list of documents and because it dealt with a new point at issue. The items that did not match between the claim to the trustee and the document appended to the appellant's assessment included the amount of the claim, which is about $1,700 less than the total amount of the assessment, the dates of the assessments which do not exactly match those given in the appendix to the Notice of Assessment, and a few amounts which do not correspond exactly to those which appear in the appendix. Mr. Pagé tried to explain these differences as best as he could. It must be pointed out that he had been called by counsel for the appellant to testify with only a few days notice.
11 The rules of civil procedure clearly require that any fact that a party intends to prove to justify a decision must have been alleged. No party may be taken by surprise. The purpose of written pleadings is so that each party will know with reasonable accuracy the facts that the opposing party will try to prove during the proceedings. Each party must be able to prepare with full knowledge of the case. Therefore, since this point was not alleged in the Notice of Appeal, it cannot be raised at the hearing. Moreover, in terms of the merit of this argument, I doubt that it would have met with much success given the wording of paragraph 227.1(2)(c) of the Act[FN2: <ul>227.1(2) A director is not liable under subsection (1), unless<li><p><em>c</em>) the corporation has made an assignment or a receiving order has been made against it under the<em>Bankruptcy and Insolvency Act</em>and a claim for the amount of the corporation's liability referred to it in that subsection has been proved within six months after the date of the assignment or receiving order.</p></li></ul>] which simply refers to the establishment of liability, and given the decision of the Federal Court of Appeal in Kyte v. R. (1996), 97 D.T.C. 5022 (Fed. C.A.). In that case, the question was whether the inaccuracy of a certificate filed under paragraph 227.1 (2)(a) of the Act was valid. Here is what Robertson J.A. said on behalf of the Court:
In order for the taxpayer to succeed on this appeal he must establish that the monetary amount stated in the certificate was incorrect and that that mistake was not excused by section 166 of the Act. Assuming, without deciding, that the amount specified in the certificate is not the correct amount, we are of the opinion that the Minister is entitled to rely on section 166.[FN3: <p>166 An assessment shall not be vacated or varied on appeal by reason only of any irregularity, informality, omission or error on the part of any person in the observation of any directory provision of this Act.</p>] ...
12 Since the preliminary points have been dismissed, let us return to the evidence relating to the appellant's liability under section 227.1 of the Act.
13 The source deduction payments ceased in March 1992. The corporation's first assessment, dated November 18, 1992, indicated that for the period from January to September 1992, the corporation owed $23,990.13 in source deductions required under the Act. Other assessments were subsequently made against the corporation. The last one is dated November 19, 1993. The total of the unremitted source deductions under the Act was $31,857.02. The total of all unremitted source deductions, including those payable under the Unemployment Insurance Act, was $65,319.29.
14 According to paragraph 11 of the Notice of Appeal (the “Notice”), the appellant planned to shut down Banquetier in June 1992 and to pay all of the amounts owing, including accounts payable. Paragraph 12 of the Notice explains that at that time, the value of the company's assets, including cash and Banquetier's accounts receivable, would have made it possible to pay not only the source deductions owing to Her Majesty the Queen under section 153 of the Act, but also to pay it creditors. Paragraph 13 of the Notice explains that two (2) days before the scheduled date for the closure of Banquetier, that is, atthe end of June 1992, the appellant was contacted by Jacques Pelletier, who indicated that he was the agent for Homards Gidney Limitée.
15 These paragraphs describe the key elements of the appellant's evidence with respect to his exercising diligence to prevent the failure. The appellant allegedly could have closed the business in June 1992 and fulfilled his obligations with respect to the payment of the source deductions, but he did not close the business because he believed, in good faith and on assertions from serious businessmen, that not only could the business survive but it could substantially increase its production and its possibility of profit. According to the appellant, this belief was prudent because it was based on assurances of a very promising market by managers of profitable businesses. According to his testimony, the appellant decided to continue the business by paying only net salaries to his employees and paying only his key suppliers. This decision was taken in the interests of the business in order to protect jobs and in so doing, he allegedly acted as a diligent director.
16 Arguments regarding the appellant's liability and the defence of diligence to prevent the failure.
17 Counsel for the appellant referred to a decision of Bell J. of this Court in Parfeniuk v. R, [1996] G.S.T.C. 22 (T.C.C.), and more specifically to the following passage:
...Comparable circumstances are not theoretical or academic. They are the economic circumstances of business in the world of commercial reality. Therefore, the “reasonably prudent person in comparable circumstances” is not a theoretician or someone with a non-business background. The “comparable circumstances” clearly include the vicissitudes of the business world. Those vicissitudes include the reality of cash flow shortage.
18 However, it should be noted that this passage is immediately followed by this analysis of the facts:
...The directors were aware of the GST quarterly payment obligation, they made what seem to me to be, in their circumstances, reasonable arrangements for the payment of same and certainly did their best to ensure that the continuing failure to pay would be dealt with.
19 To highlight the duty of the director to the corporation, counsel for the appellant cited an article by attorneys Jean-Pierre Roy and Jean-François Gaudreault-Desbiens, entitled “L'appréciation de la responsabilité des administrateurs et l'utilisation du critère subjectif dans la Loi sur le ministère du Revenu”, published in Revue de planification fiscale et successorale, Vol. 13, Nº 3, at page 325. He referred specifically to the following passage at page 347:
[TRANSLATION]
The following year, Part 1A was replaced in its entirety[FN4: <p>S.Q. 1980, ch. 28, s. 14.</p>] because of the uncertainty and criticism surrounding the initial version. The new version of Part 1A included a specific provision settling the question of the legal status of the directors of a company constituted under this part. Section 123.83 read (and still reads) as follows:
123.83 Directors, officers and other representatives of a company are considered to be mandataries of the company.
and at page 349:Article 1710 C.C. reads as follows:
The mandatary is bound to exercise, in the execution of the mandate, reasonable skill and all the care of a prudent administrator
Nevertheless, if the mandate be gratuitous, the court may moderate the rigor of the liability arising from his negligence or fault, according to the circumstances.
20 But here again, it must be noted that the authors discuss at pages 354 et seq of this article, the degree of care, diligence and skill required by the Act and indicate that diligence must be exercised to prevent the failure.
21 I am of the opinion that the case law of the Court is consistent on the diligence that the director of a corporation must show to avoid the liability prescribed by subsection 227.1(1) of the Act. It is the diligence that is concerned with preventing the failure that can, in many instances, differ from the diligence that the director must exercise toward the corporation.
22 This view is supported by the analysis made by Rip J. of this Court in Merson v. Minister of National Revenue (1988), 89 D.T.C. 22 (T.C.C.), in which he described in the following manner the standard of reasonable prudence that is required from a diligent director by subsection 227.1(3) of the Act, by differentiating it from the standard required in serving the interest of the corporation:
The prudence required by subsection 227.1(3) in the exercise of care, diligence and skill is different from that required by a director performing his duties, under corporate law, notwithstanding that subsection 227.1(3) and subsection 122(1)(b) of the Canadian Business Corporations Act, for example, both use identical words. The exercise of care, diligence and skill by the director contemplated by subsection 227.1(3) is not founded on the director's obligations to the corporation; it is based on one of the corporation's obligations under the Act and the failure of the corporation to fulfil such obligation. A director who manages a business is expected to take risks to increase the profitability of the business and the duties of care, diligence and skill are measured by this expectation. The degree of prudence required by subsection 227.1(3) leaves no room for risk.
23 The evidence is quite clear, both from the Notice and from the appellant's testimony, that the appellant made a conscious and considered choice to pay only the net salaries of employees and the amounts owing to key suppliers in the expectation that the business would become profitable. There is no evidence of efforts made or action taken to prevent the failures and to pay the taxes withheld to the Receiver General of Canada. On the contrary, the stated intent was to continue to operate the business without paying them in the hope that the business would recover.
24 The director's decision to continue operations under these circumstances is contrary to the provisions of the Act. Parliament's intent, as expressed in the provisions of the Act in question, is to prevent a director from intentionally continuing to carry on the corporation's business if the corporation does not have the funds to pay all of its salaries; if the director decides to continue operations, he incurs personal liability. The director must prove, in his defence, that he exercised reasonable diligence to prevent the failures. In the instant case, this evidence was not forthcoming.
25 Accordingly, the appeal must be dismissed. Costs are awarded to the respondent.
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