Quantz v. MNR, 88 DTC 1201, [1988] 1 CTC 2276 (TCC)

Goetz, T.C.J.:—The taxpayer appeals assessment No. 483636 dated February 15, 1984, whereby the Minister of National Revenue found him liable for failure to remit certain tax deductions made at source from the employees of Mount Forest Industries Limited ("the Company") in accordance with the provisions of subsection 227.1(1) of the Income Tax Act which reads as follows:

227.1 (1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

The appellant relies in his defence, on the provisions of subsection 227.1(3) of the Act which reads as follows:

227.1 (3) A director is not liable for a failure under subsection (1) where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

The respondent based the assessment on the following allegations of fact in his reply to notice of appeal:

4. In assessing the appellant in the amount of $45,363.93 on 15 February, 1984, the Respondent proceeded upon the following facts:

(a) at all material times, and in particular during the period 15 February, 1982, through 15 September, 1982, the Appellant was a director and the Secretary- Treasurer of Mount Forest Industries Limited (“Mount Forest");

(b) at all material times, it was a requirement of Mount Forest to have cheques signed by any two of the Appellant, Mr. Haddie (sic) (another director), Mount Forest's bookkeeper and the controller; most cheques were signed by the Appellant and the bookkeeper;

(c) Mount Forest was required to remit to the Receiver General of Canada the following amounts on account of employee's income tax withheld under Section 153 of the Income Tax Act, R.S.C. 1952, chapter 148, as amended:

Tax Withheld for:

January to June, 1982	$26,507.92
July, 1982	5,069.63
August, 1982	1,811.15
	$33,388.70

(d) Mount Forest failed to remit the sums to which reference is made in paragraph 4(c) herein to the Receiver General on or before the 15th of the month following the month to which the source deductions related, contrary to Section 108 of the Income Tax Regulations;

The appellant, who has a Grade VIII education, was in the business of manufacturing caskets for 30 years. For a number of years he and a Mr. Daly ran the business Mount Forest Caskets Ltd. as equal shareholders — the appellant being in charge of production and sales and Mr. Daly in charge of administration and finances. In 1978 the business was sold to a Mr. Donald Haddy and the appellant carried on as an employee. In September 1981 the company was merged with G.M.K. Clock Inc. under the name Mount Forest Industries Limited and the appellant became a director and secretary-treasurer for the purpose of signing legal documents. Bruce Clark, who was a chartered accountant and who had a business administration degree, took over as chairman of the board of directors. He attended the Company office at least once a week when he would discuss finances and business affairs with Mr. Haddy who also was a director and who ran the office. The office was approximately 30' x 20' and was open with desks for the staff of two bookkeepers, the comptroller, the appellant and Mr. Haddy whose office was partly partitioned off from the rest of the office.

The Company was in financial trouble from the outset and the appellant was aware of this as he had to clear orders for lumber with Mr. Haddy before making an order. He declined to be involved “in the financial end", leaving that to Mr. Haddy and Mr. Clark and he says he never inquired about finances.

Mr. Haddy carried on the day-to-day operations with the appellant. Mr. Bruce Schaeffer was employed by Mr. Clark to act as comptroller. He reported the financial picture to Mr. Clark and Mr. Haddy. Directors' meetings were held more or less monthly and on an informal basis. Minutes of formal meetings were not made available to the Court.

Mr. Haddy, Mr. Clark, the appellant, a Mr. Mueck and Mr. Schaeffer attended informal and formal directors' meetings. Accounts receivable and accounts payable were discussed at the informal directors' meetings as cash flow was a problem from the beginning. No reference or inquiries were made by anyone of remittances to the Receiver General of Canada, although Mr. Haddy and Mr. Clark acknowledged they were fully aware of the obligation of the Company to remit payroll tax deductions to the Receiver General of Canada and of the personal liability of the directors for the Company's failure to do so. In 1980 Revenue Canada had written Mr. Haddy apprising him of the importance of remitting payroll tax deductions and of his personal liability if the Company failed to do so.

By July 1982 the Company was in very dire straits and a full and formal meeting of the directors was held at their lawyer's office. At this meeting Exhibit A-1 was produced showing accounts payable as of June 30, 1982 going back to February 1982 and prior. This showed $36,912.30 owing to the Receiver General of Canada. This amount was confirmed by a Revenue Canada audit and was by far the largest account payable. Nevertheless, after this meeting certain "urgent" trade accounts were paid on the direction of Mr. Clark, Mr. Haddy and the appellant.

Mr. Bruce Schaeffer, comptroller of the Company as of July 1981, prepared and kept all records of the Company, namely books of accounts, accounts receivable and accounts payable, etc. He made a daily tally of money coming in and money going out. He could not recall any discussions with anyone with respect to payroll tax deductions although he knew Revenue Canada had to be paid the payroll tax deductions by the middle of the following month and that the Company and directors were responsible if not remitted. He says no directors ever asked him about Revenue Canada payroll tax deductions. He could not remember whether such tax deductions were being remitted to Revenue Canada and further that he kept no separate account for such deductions as it “did not fit into my accounting system". He knew, obviously, from the beginning that there were more payables than there could be handled and that creditors, who would not hold back and were pressing, were the ones that were paid. He says that the appellant never ever discussed with him finances or the books of the Company, although the appellant was present when he and Mr. Haddy were discussing accounts payable.

Mr. Bruce Clark gave evidence stating that he relied upon Mr. Schaeffer for financial information and that he did not check the accounts payable in detail, although, this is hard to reconcile with the fact that he says that he checked all accounts and that urgent pressing accounts were paid. He was aware of the necessity to remit payroll tax deductions and also of the vicarious liability of the directors for the failure of the Company to do so. He did not check this until the meeting of July 1982 when he urged Mr. Haddy and the appellant to clear the indebtedness to Revenue Canada. He never discussed Revenue Canada deductions with Mr. Schaeffer to insure there were proper remittances. He described the meetings in the office as being "open group discussions”. These were held in the general office with Haddy, the appellant and Schaeffer present.

The appellant gave evidence to the effect that he had never discussed finances with his partner Mr. Daly when he had his own business, that he never asked to be involved in financial matters of the Company, and never inquired of anyone about finances, as his sole concern was producing the caskets and selling them. He was aware throughout that the Company was in financial trouble but he never made any inquiries of the Company's ability to pay accounts payable. He says that he did not know that payroll deductions had to be made to the Receiver General of Canada. In June of 1982, an auditor from Revenue Canada attended at the office inquiring of the appellant whether he was a director and in response to an affirmative reply, advised the appellant that he would be personally responsible for the Company's failure to remit payroll tax deductions and in actual fact showed the appellant the books of the Company indicating that the taxes had not been paid. The appellant then says he spoke to Mr. Schaeffer who told him that he “did not have to account to me”. He then spoke to Mr. Haddy not about the taxes, but rather about the whole situation. Mr. Haddy's reply to his inquiry was "we are doing the best we can". He admitted that he never pushed Haddy about payments to the Receiver General or his personal responsibility to pay tax deductions if the Company failed to do so. He could not remember any discussions with Haddy about taxes owing to the Receiver General. When questioned about attendance at directors’ meetings during 1981 and 1982, he stated that he could not remember. It is possible that he could be referring to formal meetings but it is clear that he was present at most of the informal meetings as they related basically to finances.

The appellant was severely burned in a house fire in December 1981 and did not get back to the office until April 1982, although he took a two-week sales trip in March. He lost everything in the fire and was emotionally upset as a result. On his return to the office he did not inquire about the finances of the Company.

The appellant's position was that since his main function in the Company related to production and sales and not finances — then, under those circumstances, he acted as a reasonably prudent man and that he exercised a sufficient degree of care, diligence and skill to prevent the failure to remit tax deductions to the Receiver General.

The Minister relied on the findings of Bonner, T.C.J. in Lloyd Youngman & Company Inc., Trustee of the Estate of Harold Fraser in Bankruptcy v. M.N.R., [1987] 1 C.T.C. 2311; 87 D.T.C. 250; and James V. Barnett v. M.N.R., [1985] 2 C.T.C. 2336; 85 D.T.C. 619.

The facts in the Fraser case are quite similar to the facts in the case before me. The taxpayer was a shareholder and a director of a certain company whereby he was in charge of manufacturing operations. He became aware that the company was having problems with Revenue Canada but was assured by the directors responsible for financial matters that the problem was being taken care of and he was not to worry. The company had been failing to remit amounts withheld from employees and the Minister assessed the taxpayer in his capacity as director of the company for the amounts not remitted to the Minister. Judge Bonner found that the taxpayer had failed to exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

Findings

Informal meetings were held weekly when accounts receivable and accounts payable were discussed. The appellant was present at a majority of those meetings where the comptroller and his fellow directors (who had financial expertise) attended and discussed the financial position of the Company as the Company was in financial difficulties from the beginning of its operations in September 1981. The appellant relied on the financial expertise of Mr. Schaeffer, Mr. Clark and Mr. Haddy — as he did with Mr. Daly when he ran the casket manufacturing business prior to the merger in September 1981. From his years of business experience he had to be aware of the liability of the Company to remit payroll tax deductions to the Receiver General every month. There were over 50 employees in the Company and the appellant invariably co-signed the pay cheques with either the comptroller, Schaeffer or a Miss Grier. He understood accounts payable, accounts receivable and the liability imposed by personal guarantees. In short, he had a sufficient background in business to be cognizant of the Company's financial responsibilities.

He cannot, as he suggests, delegate the statutory responsibility of the Company to the other directors. He had the opportunity and a duty, at all meetings that he attended, to at least enquire about the running accounts owing to the Receiver General. He gave no instructions to anyone whatsoever to ensure payments to the Receiver General even after the visit by a Revenue Canada auditor in June. He did make inquiries of the comptroller and Mr. Haddy after the visit of the auditor but took no steps to prevent the failure of the Company to remit or to prevent further defaults. He merely accepted the comment of Mr. Haddy that "we are doing the best we can" and did nothing further.

Although the appellant was incapacitated from his burn injuries from December 1981 to the end of March 1982, he says he did not enquire about finances on his return to the office. This, even if I accept his evidence as to lack of knowledge of finances, is consistent with his conduct throughout his business life, namely, he left financial details to others. Coupled with that fact is the conclusion of the Court that he was much more conversant with the Company's affairs than he suggests he was. His taking part in the weekly informal meetings must surely have made him aware of the Company's financial problems from the start and, in particular, the problems the Company had in paying accounts of creditors.

From these facts I find that the appellant failed to exercise a requisite degree of care, diligence and skill to ascertain the failure of the company to remit or to take any steps at any time to prevent the failure to remit. These are not the actions of a reasonably prudent person under the circumstances.

For the above reasons, the appeal is dismissed.

Appeal dismissed.