Citation: 2009 TCC 66
Date: 20090204
Docket: 2006-2221(IT)G
BETWEEN:
SEAN C. CARROLL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered
orally from the bench on
November 21, 2008, at Kelowna, British Columbia.)
McArthur J.
[1] This is an appeal from a
director's liability reassessment dated May 2, 2006 by the Minister of National
Revenue pursuant to subsection 227.1(1) of the Income Tax Act. The Appellant
acknowledges he was a director of Intracoastal Systems Engineering Corporation
(“Intracoastal”) from May 1996 to February 2003. The reassessment was in the
amount of $166,314.89 in tax, employment insurance premiums and Canada Pension
Plan contributions deducted from employees’ pay cheques, which amount
Intracoastal failed to remit to the Minister. There is no dispute that the
company was indebted to the Minister in the amount exceeding $166,314 when it
was deemed to have made an assignment in bankruptcy in April 2003.
[2] Very simply, Intracoastal
was in the business of marketing automated electric meter reading systems in China. The issue is whether the Appellant
exercised the degree of care, diligence and skill to prevent the failure of Intracoastal
to remit deductions that a reasonably prudent person would have exercised in
comparable circumstances. He graduated from the University of British Columbia with a degree in Engineering in 1987. He worked strictly in
engineering for three companies after graduation before becoming an employee of
Intracoastal in the early 1990s as an electrical engineer. He remained an
employee until 1996, when he moved from the Vancouver area to Kelowna, and continued with Intracoastal
as a consultant. Also, he became a director of Intracoastal from May 1996 to February 2003,
when he resigned, as well as an officer of Intracoastal from April 1996 to June
1998 (vice-president) and from June 1998 to February 1999 (secretary). He was
also a very minor shareholder of Intracoastal.
[3] The Respondent's position,
taken in part from the Reply to the Notice of Appeal, includes that the Appellant
was knowledgeable as to the responsibilities of a director, was aware of Intracoastal's
obligations to remit tax, and knew of his statutory liability as director for Intracoastal's
failure to remit payroll source deductions. He knew, or reasonably ought to
have known, of financial and accounting problems experienced by Intracoastal,
and of its failure to remit payroll source deductions. He took no action to
prevent Intracoastal's failure to remit, and as director of Intracoastal, he
did not exercise the degree of care, diligence and skill to prevent the failure
to remit as required by subsection 227.1(3) of the Act that a reasonably
prudent person would have exercised in comparable circumstances.
[4] The Appellant was
appointed to the board because of his technical experience. The other three,
four or more board members had no such expertise, but they had backgrounds in
business accounting and finance. In his own words, the Appellant wrote, in
part, the following about his experience with Intracoastal:
I became vice-president of technology on April
the 4th, 1996. At that time Intracoastal was a start-up company. When
Rob Hanibower became president, I was given the title of vice-president,
technology. At that time I was working with two other people who were involved
with technology development. The title was mainly given to me so that when I
was doing field work in China my business card would look good. I held the
position of secretary for a brief period commencing July the 2nd,
1998. I have included a consent resolution that indicates Edison Ho became
secretary October the 17th. The board members met quarterly and to
my knowledge I attended all meetings, some by conference call. Other than to
advise Mr. Ho and Mr. Wadhwani that source deduction payments be made above all
other payments, I routinely questioned him to make sure that the payments had
been made and would continue to be made. They assured me that this was so and I
had no reason to question their honesty. In addition, when I found out these
payments had not been made, I continued as director of the company in order to
support the company's efforts to make these payments. After Mr. Ho disclosed
that payments had not been made, I asked him to make arrangements with CCRA. I
recall that he left the room to call them. I do not know the exact arrangements
that were made. I did follow up by continuing to ask Mr. Ho about this. However,
the necessary funds did not become available. Before becoming a director I had
no prior business experience. I, like most people who worked for Intracoastal,
was given some stock options which represented a small fraction of the shares
that the company issued."
I have no reason not to accept
the above, which coincides with the Appellant’s oral evidence.
[5] As in most director's
liability and due diligent cases, the defense is fact driven. It is somewhat
unusual in that the Appellant sought legal advice before accepting his
directorship, and was warned about personal liability for unremitted employee
tax deductions. He was advised to question from time to time those responsible
in finance, with respect to remittances, which he did. He relied on the chief
financial officer, Mr. Ho, or Mr. Wadhwani, who he questioned on a regular
basis. The issue of remittances was raised at the quarterly directors meetings
and confirmations that they were current is recorded in three or four minutes
contained in the Appellant's book of documents.
Over the six years of his tenure, there had been no previous remittance
problems.
[6] The accounting firm of Ellis
Foster prepared audited financial statements, Intracoastal being a public
company. In September 2002, the Appellant received assurances from trusted
fellow board members that investments were forthcoming and remittances would be
reinstated. With hindsight, he admits he should have resigned when he learned
of the default in September 2002, but I believe he felt his expertise was
needed in assisting those who were arranging financing. It appeared to him that
Intracoastal's product was going to take off.
[7] Obviously, the Appellant
had no aptitude or expertise in accounting. He had to rely on those more
qualified than he was. As stated, he was an electrical engineer, although he
had signing authority for about a year and did sign payroll cheques. He
reasonably relied on others to assure source deductions and remittances were
made.
[8] Counsel for the Respondent
referred to the Federal Court of Appeal decision in Soper v. The Queen,
and the Supreme Court of Canada decision in Peoples Department Stores Inc.
v. Wise. Soper
offers very helpful guidance in these cases, although there have been
limitations set by the Supreme Court in Peoples, relating to Soper's
subjective and objective approach.
[9] In Soper,
Robertson, J. described inside and outside directors. He stated that inside
directors are those involved in the day-to-day management of the company and
who influenced the conduct of business affairs. They have the most difficulty
in establishing a due diligence defense. He adds that outside directors may not
remain completely passive, but it is permissible for them to rely on the
day-to-day corporation managers to be responsible for payment of debt
obligations.
[10] Without a doubt, the Appellant
was an outside director. Not only was he involved mostly in science and
technology of Intracoastal's business, but he was living hundreds of kilometers
away from the mainstream of the operation. He had a positive duty to act after
September 4, 2002 when he learned of the remittance default, but by that time I
believe it was too late. The company had no money and received none. There were
no further defaults after September 2002.
[11] The facts in the Federal
Court of Appeal decision of Cameron v. The Queen
are somewhat similar to the present case. In Cameron, the Appellant was
a lawyer, but as stated by Linden,
J., he was not a hands-on person involved in the day-to-day operation of the
corporation. He was more an outside director than an inside one. Linden J. also stated that the Appellant,
early in his tenure of office and on many occasions thereafter, because he was
aware of some problems, frequently asked management about the status of the tax
remittance, and he was always assured that they were in order. He unwisely
relied on these false assurances. In fact, the remittances were not in order as
management professed and as a result, the Appellant and his fellow directors
decided to appoint an accountant who had done a report about the corporation's
financial status, to correct and oversee these matters. Linden J. further states:
These uncontested facts indicate that the Appellant
was not passive. He did as much as he could reasonably be expected to do in
order to protect the interests of Revenue Canada. He may not have been as attentive, as
skeptical and as assertive as he might have been, especially in allowing
himself to be misled by management. But it's not easy to see what more he was
required to do in the circumstances to comply with his director's duty to be
reasonably prudent in the circumstances.
This final paragraph applies
equally to the present situation. I cannot see what the Appellant could have
done more.
[12] The following as provided
by Angers J. in Head v. The Queen, also
applies to the situation in this appeal:
18 We know from the evidence that the Appellant's
responsibilities with Mainstream had nothing to do with the company's
day-to-day business and financial operations. By virtue of his background and
experience as a draftsman he was put in charge of the construction based on
Mainstream's activities. As regards the business side, he relied on O'Reilly
and left that aspect to him. Not only was he out of commission in early July
because of an accident, but he was only made aware that the HST had not been
remitted at the end of August and in early September 2003. At that time it was
almost too late …
20 Given that his background and
qualifications are in the construction field and that his involvement in
Mainstream had nothing to do with the financial business aspects of the
operations, I find that the Appellant did all that could be expected of him in
the circumstances and conclude that he has made out the defense of due
diligence. …
[13] With four or five businessmen
on the board, one wonders why the Minister had to resort to reassessing Mr.
Carroll, but that is not the issue before me, and in any event, the appeal is
allowed, with costs.
Signed at Ottawa, Canada, this 4th day of February, 2009.
“C.H. McArthur”
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