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Citation: 2005TCC213
Date: 20050505
Dockets: 2004-2135(IT)I
2004-2137(IT)I
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BETWEEN:
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RENÉ-JEAN PAGÉ,
ALAIN DENIS,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Angers J.
[1] This case involves two appeals heard on common evidence in respect of assessments dated July 25, 2003. These assessments were issued against the Appellants in their capacity as directors of a numbered company, 9082-6447 Québec Inc. (hereinafter "9082"), and held them jointly responsible for: (1) the payment of source deductions ("SDs") that were not remitted by 9082 in respect of income tax and Employment Insurance premiums for the month of August 2002, and (2) the difference between the amounts presumed paid in accordance with the T4 slips for 2002 and the amounts actually paid.
[2] It is admitted that the two Appellants were directors of 9082 at all times relevant to the case at bar and that 9082 had the legal responsibility to deduct, withhold and remit to the Receiver General of Canada SDs in respect of the earnings paid to the employees of 9082.
[3] The corporation 9082 operated a rehabilitation centre for persons with disabilities and employed between 25 and 30 health professionals. The Appellant, Alain Denis, is an accountant and processed the payroll of 9082. The two Appellants became directors of the corporation towards the end of the year 2000 and injected money into it. According to Mr. Denis, they were administrators only in theory, since 9082 was run by Linda Cameron. However, in the fall of 2001, 9082 was experiencing losses and they undertook to restructure the corporation. They laid off 15% of the employees and re-evaluated the services it offered. Ms. Cameron left 9082 and steps were taken to ensure the company's survival. The Appellant Alain Denis devoted approximately 35 hours a week to the management of 9082, for which he received no remuneration, and an employee took over management.
[4] During this burst of restructuring activity, the Fédération des caisses Desjardins informed 9082 that it intended to monitor the financial situation of the corporation and that it would henceforth have to authorize its expenditures. This new control was exercised by Marcel Routhier or Pierre Lavoie of the Fédération, a situation that existed until the subsequent bankruptcy of 9082. All cheques issued by 9082 thus had to be authorized by the Fédération, with the result that the Appellant Alain Denis claimed that he was no longer managing the company.
[5] In the summer of 2002, 9082 was still losing money, but it nonetheless had potential. The two appellants accordingly met with several parties with a view to obtaining financing, albeit without success. After it had been denied financing in August 2002, 9082 at the end of that month filed a notice of its intention to make a proposal in accordance with the provisions of the Bankruptcy and Insolvency Act; the firm of Raymond Chabot Inc. was appointed trustee as part of this proposal. 9082 then continued its operations, except that the trustee decided which expenses would be paid. The steps taken to save the company were, however, unsuccessful and 9082 declared bankruptcy on October 3, 2002.
[6] The Appellant Alain Denis prepared a document summarizing the history of the salaries paid and the remittances made in respect of source deductions (Exhibit A-5). According to his calculations, the SDs owing for the years 2000, 2001 and 2002 were $279,390.98 and the total remitted is $212,408.57. The difference is accordingly $66,982.41. In addition to this sum, there is an amount of $10,941.83 to cover a cheque that was returned for non-sufficient funds and interest and penalties of $4,571.10, giving an amount owing of $82,495.16. The trustee paid the sum of $80,768 following the winding up, leaving a difference of $1,727.16, which the Appellants paid.
[7] In this record, we note that the SDs for March and April 2002 were not remitted. An auditor of the Respondent went to the company premises in April 2002 to investigate the situation and it was at that point that the Appellant René-Jean Pagé, through his corporation, paid $10,000 to cover the arrears. According to the Appellant Alain Denis, the SD payment was delayed because of delays in collecting outstanding debts. 9082 had no bank account in trust for SDs because it had gone out of business due to a lack of funds.
[8] According to the Appellant Alain Denis, the interest and penalties were paid by the trustee, and the trustee is solely responsible for the SDs for August and September 2002. He acknowledges, nonetheless, that there may have been errors in his calculations.
[9] The Appellant René-Jean Pagé was not initially involved in the day-to-day management of 9082. He became involved in 9082 as an investor, with the result that in September 2000, through his companies, he considered himself a shareholder-lender. Not until October 2001 did he learn that he was in fact a director of 9082, at the point where Linda Cameron assigned her assets and declared bankruptcy.
[10] This was the point at which he became aware of the scale of the financial problems facing 9082 and the need to re-launch the company. Additional investments were needed and requests for financial assistance were sent out everywhere. A new action plan was prepared with the help of a marketing consultant, Luc Masson, and meetings took place with everyone involved. Everything seemed to be going well in June 2002, but by early August 2002 the situation was hopeless; this led to a meeting with the trustee and the proposal to the creditors.
[11] In 2002, the Appellant René-Jean Pagé injected the sum of $42,000 into the company to enable 9082 to meets its financial obligations. He was relying on the other appellant to provide day-to-day management and to keep in touch with him. His role was primarily to oversee the re-launch of 9082 and to inject funds into the company to ensure its survival. As far as the SDs were concerned, he stated that he was no longer aware of the details, but acknowledged that he was receiving monthly internal statements and that he was aware of the losses. He nevertheless does not understand why the SDs were not remitted, because 9082 was paying only what was necessary. He also acknowledged that the SDs, due to the force of circumstances, were used to pay certain expenses, since 9082's balance sheet was indicating losses.
[12] According to Marcel Routhier, the involvement of the Fédération Desjardins began in the summer of 2001, following a request for assistance from the Caisse populaire Desjardins in St-Basile. The Fédération becomes involved when a customer of a branch of the Caisse is experiencing financial problems. It provides regular monitoring and works in cooperation with the client. In the summer of 2002, the Fédération was in contact with 9082 two or three times a week. During this period, the bank account of 9082 could not be overdrawn and invoices could be paid only with the authorization of Mr. Routhier or his replacement. A list of supplier accounts was provided to him, together with the cheques, and he decided which ones would be paid. He claims that the Fédération was not required to adhere to the SD remittance schedule and he does not remember being asked by any of the appellants to remit SDs.
[13] Nicole Butler has been a collections officer for the Respondent since 1994. She checked the calculation of SDs by 9082 for the years 2001 and 2002. She agrees with the calculations of the Appellant Alain Denis in respect of the SDs owing for 2001 and 2002, namely $239,721,60. She also agrees with his calculation of the payments made by 9082, except that she excludes therefrom a cheque in the amount of $10,941.83 dated August 15, 2002, which was returned for non-sufficient funds and the payment of $4,314.79 from March 2001 which was not received by her department. She had asked the appellants, moreover, to provide her with evidence of this payment, but never received anything. After excluding these two amounts, the amount paid is $157,482.57, which leaves a balance of $82,239.03. Ms. Butler added to this amount $10,121.86 in interest and penalties, for a total owing of $92,360.89. The trustee sent her the sum of $80,768, leaving a balance owing of $11,592.89, which resulted in the assessments.
[14] According to Ms. Butler, the mistake made by the Appellant Alain Denis, was in evaluating the amount of interest and penalties at $4,571.10 instead of $10,121.86. Ms. Butler nonetheless acknowledges that the amount used by the Appellant Alain Denis is the one stated by the Minister when he filed his claim with the bankruptcy trustee. She added, however, that this was merely the balance owing at the time and not the total amount of interest and penalties in connection with the 9082 account. Ms. Butler also added that arrears payments are applied first against interest and penalties, with the result that the balance represents the unpaid SDs.
[15] A worksheet prepared by Ms. Butler was filed in evidence (Exhibit I-2); it shows a breakdown of the SDs, interest and penalties assessed as well as the interest for the years 2001 and 2002. The balance owing, $92,360.92, is the same as that claimed from the trustee, and the agreement reached with the trustee stipulated that the SDs would be paid out of the money owing to 9082. The amount of $80,768 is the amount received from the trustee, which leaves a balance of $11,592.84. This balance does not take into consideration the payment of $1,727.16 made by the appellants.
[16] The first requirement is thus to determine the balance actually owed by 9082, of which the appellants were the directors. According to the Notice of Assessment, the balance is $11,592, made up of an assessment dated September 15, 2002, in the amount of $4,716.81 for the month of August 2002, and an assessment dated October 21, 2002, in the amount of $6,876.03, which is the difference between the amounts shown on the T-4 slips of the employees of 9082 and the amounts that the company actually remitted.
[17] Initially, the parties were agreed that the amount of SDs to be remitted for 2001 and 2002 is $239.721.60, plus interest and penalties. According to the appellants, the amount of interest and penalties reported to the bankruptcy trustee is $4,571.10. According to the Respondent, her worksheet (Exhibit I-2) shows that interest and penalties were established as of May 28, 2005 for arrears for the months of March, April and May 2002, as well as for 2001 and subsequently, that is September 10, 2002. Some interest was assessed and other amounts were added to the account. The total of interest and penalties is $10,121.86. Ms. Butler explained that, when a payment is made and there are interest and penalties, the payment is applied to them before being applied to the principal or to the amount owing. This would explain the statement to the trustee that the interest owing was $4,571.10, and not $10,121.86.
[18] In the document showing the history of salary deductions and remittances made (Exhibit A-5), the appellants maintain that all the SDs were remitted and that they no longer owe anything. Their calculations are as follows, except that I have redone them to include only the years 2001 and 2002:
SDs owing for 2001-2002
Interest and penalties
Total payable
Amounts remitted in 2001-2002 (excluding one NSF cheque in August 2002 for $10,941.83)
Balance due
Payment made by trustee
Amount remitted by the appellants
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$ 239,721.60
$ 4,571.10
$ 244,292.70
$ 161,797.33
$ 82,495.37
$ 80,768.00
$ 1,727.37
$ 1,727.16
0
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[19] For her part, the Respondent explained that the worksheet (Exhibit I-2) takes interest and penalties into account, as explained above. She added to the amounts owed by 9082 the March 2001 payment of $4,314.79 which, according to CRA computer data, was never received. These calculations give the following result:
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SDs owing for 2001-2002
Interest and penalties
Total payable
Amounts remitted (excluding the March 2001 cheque for $4,314.79)
Balance due
Payment made by trustee
Final balance due
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$ 239,721.60
$ 10,121.86
$ 249,843.46
$ 157,482.54
$ 92,360.92
$ 80,768.08
$ 11,592.84
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[20] The interest and penalties, combined with the March 2001 cheque, explain the discrepancy between the parties. By adding these two amounts to the payment of $1,727 made by the appellants, we arrive at the amount of the assessment, namely $11,592.84. I have re-done the calculations for 2001 and 2002, in view of the fact that there were no late payments or arrears outstanding at the end of 2000.
[21] That said, how can one reconcile this discrepancy and the amount that it represents with the Notice of Assessment (Exhibit A-1), which shows an amount of $4,716.81 for August 2002 and an amount of $6,876.03 for the difference in the T-4 slips for 2002? According to Ms. Butler, her worksheet (Exhibit I-2), the assessment for August was $10,319.47. When the trustee made his payment, the amounts paid were applied against interest, penalties and the oldest SDs, leaving a balance of $4,716.81 relative to the August 2002 assessment. Also according to Ms. Butler, the amount of $6,876.03 represents the difference between the 9082 remittances in May, June, July and August 2002, and the amount that was actually due for those four months. These explanations seem to me plausible, even if, at first glance, the way they are arrived at seems complex. I am nonetheless satisfied, based on the evidence presented, that the actual discrepancy between the parties is accounted for by the interest and penalties, together with the payment of March 2001, which was not received. The appellants have not proven that the March 2001 payment was made. A reconciliation of bank statements at the time would surely have alerted the Appellant Alain Denis to the fact that the cheque in question had not been cashed, or the bank statements or a copy of the cheque could have been entered in evidence in order to confirm the payment. I am accordingly satisfied that the calculations by Ms. Butler are reliable and that 9082 still owes $11,592.84, less the amount of $1,727.16 already paid.
[22] Our task now is to determine whether the Appellants, in accordance with paragraph 227.1(3) of the Income Tax Act (the "Act"), have established, based on a preponderance of probabilities, that they acted with the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. The relevant legal provisions are found at subsections 227.1(1), 227.1(2) and 227.1(3) of the Act and at subsections 83(1), 83(2) and 83(3) of the Unemployment Insurance Act which read as follows:
227.1: Liability of directors for failure to deduct
(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 pay any interest or penalties relating thereto.
Limitations on liability
(2) A director is not liable under subsection 227.1(1), unless:
(a) a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part;
(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or
(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.
Idem.
(3) A director is not liable for a failure under subsection 227.1(1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
83: Liability of directors
(1) If an employer who fails to deduct or remit an amount as and when required under subsection 82(1) is a corporation, the persons who were the directors of the corporation at the time when the failure occurred are jointly and severally, or solidarily, liable, together with the corporation, to pay Her Majesty that amount and any related interest or penalties.
Application of Income Tax Act provisions
(2) Subsections 227.1(2) to (7) of the Income Tax Act apply, with such modifications as the circumstances require, to a director of the corporation.
Assessment provisions applicable to directors
(3) The provisions of this Part respecting the assessment of an employer for an amount payable under this Act and respecting the rights and obligations of an employer so assessed apply to a director of the corporation in respect of an amount payable by the director under subsection (1) in the same manner and to the same extent as if the director were the employer mentioned in those provisions.
[23] The state of the law has been well summarized in a decision of the Federal Court of Appeal, Soper v. Canada, [1998] 1 F.C. 124, in which Robertson J. expressed himself as follows in respect of due diligence and the obligation of directors to act, drawing a distinction between internal directors and outside directors. I reproduce below pages 155, 156, 160 and 161 (paragraphs 40 and 41, 44, 52 and 53):
This is a convenient place to summarize my findings in respect of subsection 227.1(3) of the Income Tax Act. The standard of care laid down in subsection 227.1(3) of the Act is inherently flexible. Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the director, as well as his or her corporate circumstances in the form of inter alia, the company's organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons).
The standard of care set out in subsection 227.1(3) of the Act is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligance law standard that governs these cases. Rather, the Act contains both objective elements - embodied in the reasonable person-language - and subjective elements - inherent in individual considerations like "skill" and the idea of "comparable circumstances". Accordingly, the standard can be properly described as "objective subjective".
[...]
At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that my ability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. At the same time, however, it is difficult to deny that insider directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that that factor should overtake the assumption that they did know, or to ought to have known, of both remittance requirements and any problem in this regard. In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect.
[ ... ] This is not to suggest that a director can adopt an entirely passive approach but only that, unless there is reason for suspicion, it is permissible to rely on the day-to-day corporate managers to be responsible for the payment of debt obligations such as those owing to Her Majesty. This falls within the fourth proposition in the City Equitable case: see discussion supra, at page 146-147. The question remains, however, as to when a positive duty to act arises.
In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, appraised of the possibility of such a problem is where the company is having financial difficulties. [ ... ]
[24] This distinction nonetheless does not allow for the application of a different standard to different directives. Létourneau J., in Corsano v. Canada, [1999] 3 F.C. 173, 99 DTC 5658, specified, in referring to Soper, that what emerges clearly from this decision is that the application of the standard, which is flexible on account of a variety of different types of knowledge, factors and circumstances that must be assessed in determining whether or not, in a given situation, a director has met the standard of care set out in the Act.
[25] That said, it is important to identify the periods in which the breach occurred. Examining the worksheet (Exhibit I-2) tabled by the Respondent, one notes that the SDs for 2001 were not all remitted. The assessment of May 28, 2002 with respect to 9082 shows SDs not remitted in 2001 in the amount of $23,569.34 and SDs not remitted in 2002 in the amount of $40,452.39. For 2001, according to exhibit A-5, SDs were remitted each month of the year, with the exception of the payment that was not received in March 2001, but the amounts were not sufficient. In 2002, payments in respect of SDs were made each month, with the exception of February to April, inclusively. A payment of $10,000 made in April 2002 by the Appellant René-Jean Pagé at the time of the audit filled this gap in the payments. The cheque for $10,941.83 covering the SDs for July, which was issued on August 15, 2002, was not accepted because of non-sufficient funds, and a payment was made in September for the month of August. The final assessment shows, however, that, despite the SD payments, there was still a discrepancy between the amounts remitted and the amounts withheld, as shown on the T-4 slips.
[26] Even if the payment of SDs each month did not appear to correspond to the amounts actually due, subsequent payments made up the difference, such that the actual arrears did not occur until March 2002. I accordingly believe that the analysis of the circumstances of this failure to comply should begin at this point. Furthermore, the calculations of SDs owing made by the Auditor and by the Appellant Alain Denis include the period up to the end of August 2002, prior to the involvement of the trustee. In September 2002, the trustee authorized the payment of the SDs for the preceding month of August.
[27] In the instant case, I am of the opinion that the two appellants, from Spring 2002 on, were very much involved in the day-to-day activities of 9082. The Appellant Alain Denis, in his capacity as the accountant, was well aware of the obligations upon him to remit SDs monthly. Even if the cheques prepared by 9082 had to be approved by the Fédération, it was more interested in controlling the operating funds of 9082 as well as the choice of which creditors to pay. Furthermore, the cheques for the SD payments until March 2002 were approved by the Fédération. In my view, it was the lack of funds which prevented these payments. This new control did not prevent the SD remittances, especially since the Appellant Alain Denis recognized that the payment of SDs was delayed because of the delay in collecting receivables. He added that the fact of having a separate bank account for SDs would have resulted in the closure of 9082 because of a lack of funds. This means that the SDs were used as operating funds for the corporation.
[28] With regard to the Appellant René-Jean Pagé, he became very involved in Spring 2002. He was very much aware of the financial difficulties that 9082 was having. His experience as a businessman should have alerted him to his responsibility to ensure that the SDs were remitted. He was aware of the losses and he was receiving monthly internal balance sheets. It is true that he took many steps to save 9082 and injected additional funds into it. However, it was only after the visit of the auditor in April 2002 that he injected $10,000 into it to repay part of the SDs, whereas the amount due was much greater. It is thus clear to me that he did not devote much attention to this question prior to the visit of the auditor. Knowing that the internal monthly balance sheets showed losses, he admits that, by force of circumstances, the SDs were used to pay other expenses.
[29] Although the involvement and the steps taken by the Appellant René-Jean Pagé are laudable, they were directed towards the re-launch of 9082 with the primary aim of saving his investment rather than preventing the failure to remit the SDs.
[30] The obligations of directors are to warn and to prevent failure to remit SDs, and not to delay their remittance in order to pay other creditors or in the hopes of a return to financial health.
[31] I accordingly conclude that the appellants did not act with the degree of care, diligence and skill to prevent the failures set out in the Act which a reasonably prudent person would have exercised under the same circumstances. The appeals are dismissed.
Signed at Edmundston, New Brunswick, this 5th day of May, 2005.
Angers J.
Translation certified true
on this 7th day of March, 2006
Garth McLeod, Translator
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