Lamarre
Proulx,
T.C.J.:—The
appellant
is
appealing
the
respondent's
assessment
made
pursuant
to
section
227.1
of
the
Income
Tax
Act
(the
Act).
The
appellant
was
assessed
with
nine
other
persons.
The
appeal
of
John
Laxton
v.
M.N.R.,
[[1989]
2
C.T.C.
2407]
sets
out
the
circumstances
of
this
appeal.
In
the
present
case,
the
appellant
in
addition
to
the
defence
raised
by
the
other
appellant
put
forward
a
defence
of
due
diligence
pursuant
to
subsection
227.1(3)
of
the
Act.
The
facts
pertaining
to
the
appellant's
case
are
the
following:
In
October
1983,
when
the
Vancouver
Whitecaps
Soccer
Partnership
(partnership)
became
the
Vancouver
Whitecaps
Soccer
Limited
Partnership
(limited
partnership),
the
appellant's
brother
who
was
also
a
partner
decided
to
retire
from
the
partnership
and
he
strongly
advised
the
appellant
to
do
likewise.
The
appellant
did
terminate
his
obligations
as
a
partner
in
the
partnership
but
subscribed
$20,000
to
the
limited
partnership.
He
did
so
for
his
interest
in
promoting
soccer,
but
did
not
want
to
participate
any
further.
The
appellant
terminated
his
obligations
as
a
partner
in
the
partnership
by
transferring
for
an
amount
of
$400,000
his
interest
to
another
person
involved,
Mr.
Carter.
This
is
related
in
an
agreement
dated
November
7,
1983.
Article
1
of
this
agreement
reads
as
follows:
1.
Purchase
and
Sale
Cosmopolitan
agrees
to
sell
and
transfer
to
Carter
all
of
its
right,
title
and
interest
in
and
to:
(a)
Vancouver
Whitecaps
Partnership;
(b)
Whitecaps
Soccer
Limited
Partnership;
and
all
of
its
shares
in
the
capital
stock
of:
(c)
Vancouver
Professional
Soccer
Ltd;
(d)
Whitecaps
International
Tours
Ltd.
(which
interest
and
shares
are
collectively
referred
to
as
the
"Property").
The
purchase
of
the
units
in
the
Limited
Partnership
is
worded
as
follows:
5.
Purchase
of
Limited
Partnership
Units
Carter
warrants
to
Cosmopolitan
that
it
shall
have
the
right
to
purchase
45,000
units
in
the
new
Limited
Partnership
(representing
3%
of
the
total
units
of
the
new
Partnership)
which
is
to
be
established
to
carry
on
the
operations
of
the
Vancouver
Whitecaps
Soccer
Team
and
Cosmopolitan
covenants
and
agrees
with
Carter
to
purchase
same.
In
accordance
with
this
provision,
Cosmopolitan
agrees
to
execute
the
promissory
note
and
the
subscription
form
attached
to
this
letter
and
return
the
document
together
with
payment
of
$22,500
to
Davis
&
Company
in
trust
upon
acceptance
of
this
letter
agreement.
Cosmopolitan
is
for
Cosmopolitan
Wine
Agents
(B.C.)
Ltd.
which
is
the
appellant's
company.
The
appellant
and
the
appellant's
solicitor
testified
in
this
case.
Both
testimonies
were
to
the
effect
that
they
believed
that
the
appellant's
links
with
the
corporation
had
been
severed
at
the
time
of
the
sale
of
the
appellant's
interest
in
the
partnership.
Here
is
an
excerpt
from
Mr.
Jones’
testimony
in
his
direct
examination:
Q.
Now,
did
you
have,
at
least
at
the
time
of
your
dealings
in
November
of
1983,
did
you
know
that
Mr.
Panz,
Mr.
Gus
Panz
was
a
director
of
Vancouver
Whitecaps
Soccer
Ltd.?
A.
That
was
the
general
partner
of
the
limited
partnership?
Q.
Yes.
A.
No.
I
would
have
been
very
surprised
at
that.
Q.
I'm
sorry,
I
meant
to
say
Vancouver
Professional
Soccer
Ltd.
A.
Yes.
Q.
You
didn't
know
that
at
that
time?
A.
No,
we
didn't
know.
Q.
Did
you
know
that
Eric
Panz
was
a
director?
A.
No,
I
didn't.
Q.
Did
you
have
any
discussions
with
either
of
Eric
or
Gus
Panz
at
the
time
of
the
sale
of
their
interest
to
Mr.
Carter
concerning
their
participation
as
directors
of
the
limited
company?
A.
Not
until
later.
Q.
And
when
you
say
later,
when
was
that?
A.
It
would
be
around
the
middle
of
1984.
Q.
And
at
the
time
of,
or
at
least
at
that
time
what
discussions
did
you
have,
and
with
whom?
A.
The
financial
affairs
of
the
club
were
getting
steadily
worse,
and
I
was
concerned
for
their
liability
if
they
were
still
involved.
And
I
asked
Gus
Panz
if
he
did
have
any
involvement
with
the
general
partner,
and
he
told
me
he
did
not.
But
just
to
be
safe
I
did
a
search
at
the
Registrar
of
Companies
Office,
and
I
found
to
my
great
surprise
that
he
was
a
director.
Q.
When
did
you
find
that
out,
do
you
recall?
A.
It
would
have
been
in
the
fall
of
‘84,
probably
around
September.
Q.
And
as
a
result
of
finding
that
information
out
what
did
you
do?
A.
I
served
the
resignation
immediately
on
the
registered
office
of
the
general
partner.
Q.
And
that
resignation
was
served
in
October,
is
that
correct?
A.
It
was
about
that,
yes.
Q.
Okay,
and
was
it
at
about
the
time
that
you
found
out
that
he
was
a
director
that
you
served
the
notice?
A.
Yes,
yes.
Within
days.
The
appellant's
perception
of
his
status
in
the
Limited
Partnership
was
as
follows:
A.
.
.
.
I
knew
I
was
a
limited
partner,
but
I
did
not
realize
I
was
a
director.
But
I
do
realize
I
was
a
limited
partner.
Q.
Now,
when
did
you
find
out
that
you
were
a
director
of
the
limited
company?
A.
Not
until
I
talked
to
Mr.
Jones.
Q.
And
when
was
that?
A.
My
corporate
lawyer.
Q.
And
when
was
that?
A.
I
don't
exactly
recall
a
date.
He
just
advised
me
he
researched
the
thing
and
he
told
me
I
was
a
director
and
I
was
just
stunned.
Counsel
for
the
appellant
referred
me
to
the
following
cases:
Cybulski
v.
M.N.R.,
[1988]
2
C.T.C.
2180;
88
D.T.C.
1531;
Edmondson
v.
M.N.R.,
[1988]
2
C.T.C.
2185;
88
D.T.C.
1542;
Fancy
v.
M.N.R.,
[1988]
2
C.T.C.
2256;
88
D.T.C.
1641;
Merson
v.
The
M.N.R.,
[1989]
1
C.T.C.
2074;
89
D.T.C.
22.
Though
it
remains
unexplained
why
the
appellant's
name
remained
on
the
list
of
the
corporation’s
directors
at
the
Registry
of
Companies
office
and
not
that
of
his
brother,
nevertheless,
I
am
of
the
view
that
the
appellant
strongly
believed
that,
in
1983,
he
had
severed
all
his
links
with
the
previous
structures
(partnership
and
corporation)
and
had
only
assumed
the
respon
sibility
of
a
limited
partner.
He
had
reasonable
grounds
to
entertain
this
belief
since
in
November
1983,
he
had
to
pay
a
large
sum
of
money
to
divest
himself
of
his
interest
in
the
partnership
and
of
all
his
shares
in
the
corporation.
I
accept
his
testimony
that
his
investment
and
participation
in
1983
were
intended
to
be
in
the
limited
partnership
only.
On
this
aspect,
I
find
the
circumstances
of
this
appeal
to
be
akin
to
those
of
the
Cybulski
case,
supra,
where
the
Associate
Chief
Judge
of
this
Court
says
at
page
2184
(D.T.C.
1535):
I
am
satisfied
that
reasonable
grounds
existed
for
the
appellant's
belief
that
he
had
severed
his
connection
with
the
Company
as
director
and
secretary-treasurer
and
concomitantly
his
responsibility
for
it
when
he
placed
his
resignation
in
the
hands
of
the
Company's
president
and
it
was
accepted
by
him.
This
relieves
him
of
vicarious
liability
for
the
Company's
default
in
remitting
the
deductions
at
source.
.
.
For
these
reasons,
the
appeal
is
allowed
with
costs.
Appeal
allowed.
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