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Citation: 2005TCC21
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Date: 20050223
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Docket: 2001-1331(IT)G
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BETWEEN:
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NICOLAS MATOSSIAN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
AND
2001-1332(IT)G
RENÉ AMYOT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
2001-1333(IT)G
MICHEL MARENGÈRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
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REASONS FOR JUDGMENT
Bédard J.
[1] The Appellants were the sole directors of
Dominion Bridge Inc. (DBI) when it failed to remit the employer and employee
premiums set out in sections 67 and 68 of the Employment Insurance Act (the
“EIA”). DBI made an assignment in bankruptcy in September 1998. The Minister of
National Revenue (the “Minister”) held the Appellants jointly and
severally liable for the premiums not remitted by DBI and issued assessments of
the Appellants dated January 6, 2000. The Appellants are appealing their
assessments for the following reasons:
(i) first, they held that
a claim had not been proved within six months after the date of DBI’s
assignment, as required by paragraph 227.1(2)(c) of the Income Tax
Act (the “Act”);
(ii) second, they claimed
that the employer premiums were not included in the joint and several liability
set out in section 227.1 of the Act and section 83 of the EIA;
(iii) last, they held that
they had acted with due diligence in the instant case and thus could not be
held jointly and severally liable for the tax liability of DBI.
A- Whether the Minister proved a claim within six months of DBI’s
assignment in bankruptcy
Position of the Appellants
[2] According to the Appellants, the Minister had
to comply with subsection 124(4) of the Bankruptcy
and Insolvency Act (the
“BIA”) to prove a claim under paragraph 227.1(2)(c) of the Act. They
held that, although the Minister produced a proof of a claim in accordance with
form 33 (accompanied, in Schedule A, by a breakdown of the amounts due
according to the year, the assessment date and the nature of the amount in
question), the Minister failed to produce supporting documentation for the
claims at issue. According to the Appellants, it was not relevant that the
trustee in bankruptcy accepted the Minister’s claim. They claimed that the
Minister had to at least attach the notices of assessment setting out the debts
at issue. In support of their claims, the Appellants referred to the following
cases: Re Norris, [1989] 2 C.T.C. 185 (C.A. Ont.); Re Riddler
(1991), 3 C.B.R. (3d) 273, [1991] B.C.J. No. 36 (B.C.S.C.); and Re Port
Chevrolet Oldsmobile Ltd., 2004 BCCA 37.
Position
of the Respondent
[3] According to the Respondent, the
testimony of Danielle Dazé, Collection Officer with the Canada Customs and
Revenue Agency (CCRA), clearly established that the notice of assessment
(Exhibit I-33) had in fact been reproduced in the proof of claim dated October
20, 1998, submitted to the trustee.
The Respondent held that the notice of assessment, as well as the proof of
claim and appendices, clearly enabled the Minister to establish a claim with
the trustee since the trustee paid the guaranteed part of the claim in full.
The Respondent added that the role of the Court was simply to determine whether
the Minister had proved a claim before the trustee. According to the
Respondent, the Court cannot replace the trustee and can only accept that the
trustee had concluded that the Minister’s claim was proved. Last, according to
the Respondent, not only did the decision in Re Port Chevrolet Oldsmobile
Ltd., supra, not support the Appellants’ position, but rather it
confirmed the discretionary power of the trustee to determine the proof
required to be convinced of the existence of any claim.
Analysis
[4] For directors to be held jointly and severally
liable, the Minister must meet the requirements of subsection 227.1(2) of the
Act. In the instant case, since it is an assignment of properties, I agree with
the parties that the requirements of paragraph 227.1(2)(c) of the
Act must be met by the Minister and not those in paragraphs 227.1(2)(a)
or (b) of the Act. Christie J. made the following comments with respect
to these two paragraphs in Kennedy v. The Queen, No. 91-152(IT),
June 17, 1991, 91 DTC 1037 (T.C.C.), aff’d by 92 DTC 6380 (F.C.A.):
It is the appellant's contention that
fulfilling the requirements of paragraph 227.1(2)(a) is not compliance with the
condition precedent in all cases. Whether there must be observance
of paragraph 227.1(2)(a) or (b) or (c) in order to do so will depend on the
facts of each case. If a corporation has commenced liquidation or
dissolution proceedings or has been dissolved, the route designated under
paragraph 227.1(2)(b) must be followed. If a corporation has made an
assignment or a receiving order has been made against it under the Bankruptcy
Act, paragraph 227.1(2)(c) governs. In other circumstances,
paragraph 227.1(2)(a) is applicable. I think that the foregoing is
the proper approach.
Roy v. Canada, No. 93-107(IT)G, April 13, 1995, [1996] 1 C.T.C.
2269, at paragraph 20 (T.C.C.), aff’d by No. A-242-95, April 16, 1996, [1996]
2 C.T.C. 198 (F.C.A.), and Pozzebon v. Canada, No. 95-4143(IT)G,
May 15, 1998, 98 DTC 1940, at paragraphs 42-43 (T.C.C.), reiterate this
passage.
[5] Consequently, I believe that pursuant to
paragraph 227.1(2)(c) of the Act, the Minister could only hold the
Appellants jointly and severally liable in the case at bar if the claim was
proved within six months of DBI’s assignment. However, this raises two
questions:
(i) Does this claim have
to be proved objectively, independent of the fact that the trustee had been
satisfied that it exists? I would repeat that, in the case at bar, the trustee
paid the guaranteed part of the claim to the Minister.
(ii) Was there a
particular method that the Minister had to use to prove the claim?
[6] I would answer the first question in the
affirmative simply because of the words used by Parliament, and by relying on Re
Port Chevrolet Oldsmobile Ltd., supra at paragraphs 24-32 (having in
mind Re Galaxy Sports Inc., [2004] B.C.J. No. 1008 at paragraph 36
(B.C.C.A.). Parliament chose to use objective terms (“a claim…has been
proved”), without, however, specifying who must be satisfied ("convaincu"). For this reason, I find that the
question must be reviewed de novo by the Court, independent of the fact
that the trustee could have been satisfied of the existence of part of the
Minister’s claim. If Parliament had chosen to include terms such as “if the
trustee is satisfied,” the Court would have only had to consider whether the trustee
had exercised his discretion judicially (see, inter alia, Cook v.
Carter, [1952] O.W.N. 155, at p. 158 (Ont. S.C.), where LeBel J. found that
the use of the expression “satisfies the judge” refers to discretion to be
exercised judicially).
[7] It follows that the Court has to determine
whether the claim had been proved and must not limit itself to considering
whether the trustee exercised his discretion judicially. This is how the Court
proceeded in Roy v. Canada, supra, at paragraphs 19 and 29
(T.C.C.); and Vanderpol v. Canada, No. 2001‑393(GST)I,
February 18, 2002, [2002] T.C.J. No. 18 (T.C.C.), without explicitly mentioning
it.
[8] The answer to the second question, regarding
how the Minister had to prove his claim, may also be obtained, at least in
part, from Roy and Vanderpol, supra. In these cases, the
Court had followed the requirements of the BIA to come to its conclusions,
without, however, saying why. The explanation is simple: the Crown is bound by
the BIA pursuant to section 4.1 of this act. Accordingly, except where
Parliament explicitly excludes the application of the BIA as it does in
subsection 227(4.1) of the Act, for example (see First Vancouver Finance v.
M.N.R., [2002] 2 S.C.R. 720 (S.C.C.)), the Crown cannot use its royal
prerogative to maintain priority as it could ordinarily: see Re Cardston
U.F.A. Co-op. Assn. (1925),
7 C.B.R. 413 (Alta. S.C.); R. v. Leach (1929), 11 C.B.R. 214
(N.B.K.B); and Comm. des valeurs mobilières c. Gagnon, [1964]
B.R. 349 (C.S. Qué.). These decisions are found on page 20 of The 2004 Annotated Bankruptcy
and Insolvency Act by L.W. Holden and G.B. Morawetz, published by Thomson
Carswell (the “2004 Annotated BIA”).
[9] Thus, in Roy, supra, Garon J. (as
he then was) referred in particular to section 124 of the BIA to arrive at the
conclusion that by producing the right form, the Minister had complied with
paragraph 227.1(2)(c) of the Act. However, it is not clear in reading
this decision how the Minister met all the conditions of paragraph 227.1(2)(c)
of the Act.
[10] Sarchuk J. had to deal with this question and
section 124 of the BIA, in Vanderpol, supra. He found that the
proof of claim filed by the Minister actually contained a statement of account showing some particulars of the claim. Sarchuk J. added that the notice of assessment
did not have to be attached to the proof of claim because the BIA did not require
it (see Vanderpol, supra, at paragraphs 8‑10).
Moreover, Beaubier J., in MacGillivray v. Canada, No. 96‑2047(GST)I,
February 19, 1997, [1997] T.C.J. No. 112 (T.C.C.), briefly stated that given
that a proof of claim had been filed by the Minister, paragraph 227.1(2)(c)
of the Act had been met (see paragraphs 9 and 10).
[11] If, in Vanderpol, supra, the
Minister had failed to attach a statement of account to his proof of claim, it
is possible that Sarchuk J. might not have come to the same conclusion. This would be in keeping with
provincial case law regarding the importance of the statement of account with a
minimum amount of acceptable details: see Re McCoubrey, (1924) 5 C.B.R.
248 (Alta. S.C.); Re Vanderweghe Ltd. (1937), 18 C.B.R. 403 (Que.
S.C.); Re Corduroys Unlimited Inc. (1962), 4 C.B.R. (N.S.) 250
(Que. S.C.); and Re Riddler, supra. See also the 2004 Annotated
BIA at page 516. A statement of account is important (a) to permit the
chair of the meeting of creditors to examine the details of the claims (see Re
London Bridge Works Ltd. (1926), 8 C.B.R. 73 (Ont. S.C.)) before
allowing each creditor to vote at the meeting (see Re Norris (1988), 67
C.B.R. (N.S.) 246, rev’d on other grounds (1989), 69 O.R. (2d) 285, 75 C.B.R.
(N.S.) 97 (Ont. C.A.); and Re Riddler, supra); and (b) to permit
creditors to assess whether they should contest the claim at issue (see Re Saykaly
(1926), 7 C.B.R. 570 (Ont. S.C.). For these decisions, see also the 2004
Annotated BIA at page 516. It may be recalled that the Appellants base their
arguments on Re Riddler and Re Norris, supra.
[12] Although a proof of claim (and I would add a
statement of account) should not be quashed because of simple technical errors
given the commercial nature of the BIA (see Atlas Acceptance Corp. v.
Fratkin (1978), 27 C.B.R. (N.S.) 220 (Man. C.A.)), it remains that any proof of claim or
statement of account must contain a reasonable amount of information.
[13] In the case at bar, the Appellants, at first
glance, did not seem to challenge the proofs of claim or the schedules, but
rather they focused on the absence of supporting documents for these claims.
First, although it seems that the filing of notices of assessments was not
specifically required by the BIA (see Vanderpol, supra), it seems, in light of the evidence
adduced, that the Minister had filed them.
Furthermore, although the Appellants claimed that “Schedule A” did not
contain statements of account, I am of the opinion that they were in fact
statements of account.
[14] Should other documents have been filed? I would
answer this question in the negative, as subsection 124(4) of the BIA seems
less clear with respect to supporting documents than it is for the statement of
account. Case law also supports this reasoning.
[15] For these reasons, I find that the Minister had
proved his claim in accordance with paragraph 227.1(2)(c) of the Act.
B- Employer
premiums
[16] Are employer premiums included in the
joint and several liability of the directors provided in section 227.1 of the
Act and section 83 of the EIA?
[17] The Appellants held that under these two
sections, they could only be held jointly and severally liable for the employee
premiums, whether or not they were withheld, that were not remitted to the
Receiver General for Canada. In arriving at this interpretation, the
Appellants provided a rather original interpretation of sections 82 and 83 of
the EIA, a comparison with other tax laws and an interpretation of the purpose and
spirit of these provisions.
[18] The interpretation of sections 82 and
83 of the EIA given by counsel for the Appellants in his written submissions is
worth quoting:
[Translation]
Section 83
EIA states that directors are jointly and severally liable together with the
corporation for which they act. The section refers to section 82(1) EIA to
determine the parameters of this liability. Furthermore, in subsection 2, using
a reference technique, section 83 EIA specifies that the rules set out in
subsections 227.1(2) to (7) ITA apply in this situation.
Thus, section 83 EIA seems to be clear but
the scope of the concept of “remittance” is not defined. This section uses the
words “fails to deduct or remit”. “Deduct” (déduire) is defined in the
Petit Larousse as follows:
“Soustraire d’une somme”
[Translation] “subtract from an amount”
This indicates to us that an amount to
remit must first exist, which would come from a source deduction. The logical
interpretation would be to view the directors’ liability, under section 83 EIA,
as it relates to the amount deducted from the wages paid, but that the employer
failed to remit, as well as to the failure to deduct them. The effect of this
section is that the directors are liable for the amount deducted from wages and
they are liable to the Crown, for the equivalent amount regardless of whether
it was deducted or not. The spirit of this section conforms perfectly with
section 227.1 ITA, creating a liability for the director solely with respect to
the employee premium or similar amounts.
Section 82 EIA establishes the amount that
the employer must deduct and remit to the Receiver General with the
corresponding employer premium payable under section 68 EIA The use of the verb
“remit” to describe the payment of an employer premium as well as the
remittance of deductions leads to confusion.
Section 83 EIA seems to limit the
directors’ liability to the amount, whether or not it was deducted, that was
not remitted to the Receiver General. Section 82 EIA, read together with the
definition of the word “deduct,” completes section 83 EIA by specifying where
the amount should be deducted from. In other words, deductions are taken from
the wages of third persons (employees), amounts that are subject to a deemed
trust with respect to the government. This interpretation conforms with the
purpose of sections 83 and 82(1) EIA, which will be discussed below since the
first step is to establish the ambiguity in reading these sections, considering
the ordinary meaning of the words in them.
The second paragraph of section 83 EIA
applies subsections 227.1(2) to (7) ITA. The provisions in question do not in
any way deal with the employer premium. The fact that section 83 EIA refers to
the administrative provisions of section 227.1(1) ITA infers that there is some
similarity between the amounts that the Crown is trying to recover from
directors through these two sections.
[19] According to the Appellants, this interpretation
based on the ordinary meaning of the words is supported by the spirit of the
EIA, whose purpose is to ensure that the amounts that should be deducted and
remitted are remitted despite the financial difficulties of the debtor
corporation. Accordingly, by making directors jointly and severally liable for
the employee premiums that have not been remitted by the employer corporation,
whether or not they were deducted, Parliament intended, according to the
Appellants, to reduce the increasing number of failures to remit caused by the
recession that was wreaking havoc when these provisions were adopted in the
early 1980’s. Furthermore, to support their position, the Appellants referred
briefly to provisions of other tax laws.
Analysis
[20] The relevant legislative provisions
read as follows:
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67. Subject
to section 70, a person employed in insurable employment shall pay, by
deduction as provided in subsection 82(1), a premium equal to their insurable
earnings multiplied by the premium rate set by the Commission.
68.
Subject to sections 69 and 70, an employer shall pay a premium equal to 1.4
times the employees' premiums that the employer is required to deduct under
subsection 82(1).
…
82. (1)
Every employer paying remuneration to a person they employ in insurable
employment shall
(a) deduct the prescribed
amount from the remuneration as or on account of the employee's premium
payable by that insured person under section 67 for any period
for which the remuneration is paid; and
(b) remit the amount,
together with the employer's premium payable by the employer
under section 68 for that period, to the Receiver General at
the prescribed time and in the prescribed manner.
…
83. (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 liable, together with the corporation, to pay Her
Majesty that amount and any related interest or penalties.
(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.
(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.
Income Tax
Act
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.
(2) A director is not liable under
subsection 227.1(1), unless
…
(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.
(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.
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67. Sous
réserve de l'article 70, toute personne exerçant un emploi assurable verse,
par voie de retenue effectuée au titre du paragraphe 82(1), une cotisation
correspondant au produit de sa rémunération assurable par le taux fixé par la
Commission.
68. Sous
réserve des articles 69 et 70, la cotisation patronale qu'un employeur est
tenu de verser correspond à 1,4 fois la cotisation ouvrière de ses employés
qu'il est tenu de retenir au titre du paragraphe 82(1).
[…]
82. (1)
L'employeur qui paie une rétribution à une personne exerçant à son service un
emploi assurable est tenu de retenir sur cette rétribution, au titre
of the cotisation ouvrière payable par cet assuré en vertu de l'article
67 pour toute période à l'égard de laquelle cette rétribution est
payée, un montant déterminé conformément à une mesure d'ordre réglementaire
et de le verser au receveur général avec la cotisation patronale
correspondante payable en vertu de l'article 68, au moment et
of the manière prévus par règlement.
…
83. (1) Dans
les cas où un employeur qui est une personne morale omet de verser ou de
déduire un montant of the manière et au moment prévus au paragraphe 82(1),
les administrateurs of the personne morale au moment de l'omission et la
personne morale sont solidairement responsables envers Sa Majesté de
ce montant ainsi que des intérêts et pénalités qui s'y rapportent.
(2) Les paragraphes 227.1(2) à (7) of the Loi
de l'impôt sur le revenu s'appliquent, avec les adaptations nécessaires,
à l'administrateur of the personne morale.
(3) Les dispositions of the présente partie
concernant la cotisation d'un employeur pour un montant qu'il doit payer en
vertu of the présente loi et concernant les droits et les obligations d'un
employeur cotisé ainsi s'appliquent à l'administrateur d'une personne morale
pour un montant que celui-ci doit payer en vertu du paragraphe (1) of the
manière et dans la mesure applicables à l'employeur visé par ces
dispositions.
Loi de l’impot sur le revenu
227.1. (1)
Lorsqu'une société a omis de déduire ou de retenir une somme, tel que prévu
au paragraphe 135(3) ou à l'article 153 ou 215, ou a omis de remettre cette
somme ou a omis de payer un montant d'impôt en vertu of the partie VII ou
VIII pour une année d'imposition, les administrateurs of the société, au
moment où celle-ci était tenue de déduire, de retenir, de verser ou de payer
la somme, sont solidairement responsables, avec la société, du paiement de
cette somme, y compris les intérêts et les pénalités s'y rapportant.
(2) Un administrateur n'encourt la
responsabilité prévue au paragraphe (1) que dans l'un ou l'autre des cas
suivants:
c) la société
a fait une cession ou une ordonnance de séquestre a été rendue contre elle en
vertu of the Loi sur la faillite et l'insolvabilité et l'existence
of the créance à l'égard de laquelle elle encourt la responsabilité
en vertu de ce paragraphe a été établie dans les six mois
suivant la date of the cession ou de l'ordonnance de séquestre.
(3) Un administrateur n'est pas responsable
de l'omission visée au paragraphe (1) lorsqu'il a agi avec le degré de soin,
de diligence et d'habileté pour prévenir le manquement qu'une personne
raisonnablement prudente aurait exercé dans des circonstances comparables.
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[21] In short, sections 67 and 68 of the EIA create
the obligation to pay premiums and set their amounts, whereas subsection 82(1)
of this act obliges the employer to deduct employee premiums from their
earnings and remit them to the Receiver General for Canada with the employer
premiums payable under sections 66 and 67 of the EIA, which provide that these
premiums equal a certain percentage of the “insurable earnings” of an
employee. It seems very clear to me in reading sections 67 and 68 and
subsection 82(1) of the EIA that the employer premiums must be
“remitted” by the employer to the Receiver General for Canada. The sole purpose of subsection 83(1) of the EIA is to make directors
jointly and severally liable for the employer corporation’s failure to meet its
obligations under subsection 82(1) of this act. Furthermore, using the
reference technique, subsection 83(2) of the EIA specifies that the
rules found in subsections 227.1(2) to (7) of the Act are applicable.
[22] In order to accept the Appellants’
interpretation of these legal provisions, the conclusion would have to be made
that the grammatical and ordinary meaning of the words “pay” or “remit” is that
to remit an amount, it first has to be deducted form a specific source.
[23] In my opinion, the modern method of legislative
interpretation must be applied in the case at bar, specifically the rule set
out by E.A. Driedger in Construction of Statutes (2nd ed., 1983) at page
87, which reads as follows:
…the words of an Act are
to be read in their entire context and in their grammatical and ordinary sense
harmoniously with the scheme of the Act, the object of the Act and the
intention of Parliament.
[24] This rule has been adopted by the Supreme Court
of Canada many times in all areas, including tax law.
[25] It follows that the first part of my analysis
will involve determining the ordinary and grammatical meaning of the word
“remit” and the French words “verser” and “payer.” Since these words are not
defined in the EIA and they do not have a well-defined and recognized legal
meaning, I will have to determine their ordinary and grammatical meaning. In
other words, I will have to determine whether one of these words supports the
Appellants’ thesis.
[26] As it is acceptable to use dictionaries to find
the meaning of words (P.‑A. Côté, Interpretation of Legislation
in Canada, 3rd ed., Carswell, 2000, at 261-262), I will look at the
definitions of “verser,” “payer” and “remit” given in the Petit
Robert, Dictionnaire de la langue française, 1991, the Grand
dictionnaire terminologique of the Office québécois de la langue française,
electronic version, 2003, the Dictionnaire de droit québécois et canadien,
2nd ed., Wilson & Lafleur, 2001, the Oxford English Dictionary Online,
Oxford University Press, 2004, and Black’s Law Dictionary, 7th ed.,
1999:
Le Petit Robert,
Dictionnaire de la langue française, 1991
“verser”...Apporter
(de l’argent) à une caisse, à une personne, à titre de paiement, de dépôt, de
mise de fonds. V. Payer. Les sommes à verser au fisc.
Le Grand dictionnaire
terminologique of the Office québécois de la langue française, electronic
version, 2003
“verser”
Verser (de l’argent).
Dictionnaire de droit
québécois et canadien, 2nd ed., Wilson & Lafleur, 2001
“versement”
Action de remettre à quelqu’un une somme d’argent en paiement d’une dette ou à
tout autre titre.
English:
payment
Oxford English
Dictionary Online, Oxford University Press, 2004
2.
To give up, resign, surrender (a right or possession). ...14. To send or
transmit (money or articles of value) to a person or place.
Black’s Law Dictionary,
7th ed., 1999
“remit”
To transmit (as money).
[27] An examination of these definitions leads me to
conclude that the Appellants cannot use the grammatical meaning of these words
to conclude that to remit an amount, it must first be deducted from a given
source. The ordinary meaning of these words has the same effect. In fact, few
people would conclude that to remit an amount, it must first be deducted from a
given source. My overall analysis of all the legislative provisions involved
and the ordinary and grammatical meaning of these words leads me to conclude
that the amounts to remit are not limited to the amounts that must be deducted
from the employees’ insurable earnings, but include all the amounts referred to
by Parliament in the legislative provisions involved.
[28] In my opinion, this interpretation respects the
spirit and purpose of the EIA and Parliament’s intent as presented by the
Appellants. However, if, as the Appellants claim, Parliament had wanted to
reduce the increasing number of failures to pay caused by the recession, why
would Parliament have limited itself to making the directors jointly and
severally liable for employee premiums and not employer premiums? In theory,
these amounts are as important to the effective operation of the EIA as the
employee premiums are. Ferreira v. Canada (M.N.R.) is quite eloquent in this respect:
The legislation is
called "unemployment insurance". The concept of insurance
is that a person will pay a certain amount (called a "premium") in
order to be wholly or partly indemnified against a foreseeable
risk. If the premium is not paid, there is no indemnity against the
risk. In the scheme of this legislation, the risk is
unemployment. Applying the basic concept of insurance, I should
think that if no employee's or employer's premiums were paid during the
28-month period, then the Appellant had no unemployment insurance with respect
to that period. This elementary thought is reinforced by the terms
of certain Regulations connected with the Unemployment Insurance Act.
[29] If that is the consequence of not paying
employee and employer premiums, it is even more obvious that Parliament wanted
to guarantee its funding source for the employment insurance program and that
one of the means chosen was to make directors liable for the employee and
employer premiums not remitted by the employer.
[30] Last, the Appellants tried, in their written submissions,
to refer to other tax laws as well as subsection 71(2) of the former Unemployment Insurance Act, 1971. I do not see how their submissions in this regard
could convince me otherwise. In fact, their analysis of these other provisions
seemed irrelevant to the case at bar. As for subsection 71(2), although it only
deals with the employee premiums, the Appellants failed to cite section 68 of
this act (now subsection 82(1)), that sets out the obligation to pay employee
and employer premiums.
C- In the case at bar, did the
Appellants exercise due diligence?
Testimony
[31] Nicolas Matossian is the only one of the three
Appellants who testified at the hearing. Vitold Jordan, Vice President-Finance of Dominion Bridge Corporation (DBC) also
testified for the Appellants. Danielle Dazé, Collection Officer with CCRA,
testified for the Respondent. I would note that the testimony of these people
seemed credible and convincing to me.
[32] In 1997, the Appellants were the only directors
of DBI
when it failed to remit
the employer and employee premiums for three periods in 1997, July 15 to 21,
August 22 to 31 and October 22 to 31. The unpaid premiums totalled $57,000,
$47,000 and $97,000 for the three periods respectively.
[33] The Appellants’ involvement in DBC and Cedar
Group Canada (Cedar) began in 1994.
DBI was a subsidiary of Cedar, which in turn was a subsidiary of DBC. Cedar had
six other subsidiaries.
It would seem that the Appellants were directors of DBC and Cedar from 1994
until April 28, 1998. In addition to being directors of these corporations,
Messrs. Matossian and Marengère were managers at some of them.
[34] Mr. Matossian was the Chief Operating
Officer of DBC.As
such he was responsible in particular for acquisitions and the activities of the
subsidiaries of Cedar during the period at issue. He was also the director who was the most
involved in issues dealing with pay and source deductions. He was very
competent. In fact, he holds a B.A. from McGill, an M.B.A. from Harvard and a
Ph.D. in economics from McGill. He had taught, and worked in both the private
and public sectors. Furthermore, he has over 30 years of business experience.
[35] Mr. Marengère was chairman and CEO of DBC. Although he held the most senior
position, he was mainly responsible for funding activities and acquisitions. Messrs. Marengère and Matossian
communicated daily regarding everything that involved acquisitions and
activities, including source deductions.
[36] As for the Appellant Amyot, he was a
retired lawyer in his late sixties during the year at issue and should only be
considered an outside director
according to the Appellant Matossian. He was not involved in the daily
activities of the corporations, but rather was a simple representative of the
shareholders of these corporations. He had already been president of Air Canada and a director of Rothmans International.
[37] During the years at issue, Cedar acquired about
seven corporations, all of them tied directly or indirectly to the
manufacturing, construction and petroleum industries in Canada and abroad.
DBI was the first of these acquisitions in 1994. In 1997, these corporations
employed approximately 7500 persons, and it was increasingly apparent that these corporations were
difficult to manage and operated “under duress.”
[38] Among the other acquisitions, the one that
concerns us the most is that of Steen Pipeline Contractors (Steen). In fact,
before DBI failed to remit the source deductions at issue, Steen had already
failed to remit source deductions twice, in 1996 and 1997, consisting of
considerable amounts, in excess of C$8 million. Mr. Matossian had
immediately been informed of Steen’s two failures by Mr. Jordan.
[39] The role of Mr. Jordan in the organization essentially involved going from corporation to
corporation within the group to look for business opportunities and solve
problems. He was a type of “problem solver.”
However, no one, including Mr. Jordan, was supposed
to “bother” Mr. Matossian regarding problems involving amounts under $20,000,
and even under $100,000. The following is how Mr. Matossian viewed his
relationship with his employees in this regard:
A. …You know, as
usual in things like that, if there was a $20,000 gap, they wouldn’t come to me
to tell me, they would fix it themselves. I mean, we had our own management in
place to do things like that.
Q. Okay. So
$20,000 gap wouldn’t have been material enough for them to bother you.
A. No. No.
Q. Or for Mr. Jordan to bring it to your
attention.
A. No, no. And
frankly, if they’d come to me with a $100,000 gap, I would have said, you know,
what are you coming to me for? This is the kind of thing that you should be
fixing yourself.
Q. Okay. And Mr. Jordan was aware of this?
A. Yes.
To a certain extent, Mr. Jordan corroborated the testimony of Mr. Matossian on this
subject.
[40] Mr. Matossian had been informed of Steen’s
failures to pay because the amounts far exceeded $100,000. He was also able to
identify the causes of these failures. The testimony of Mr. Matossian in this
respect is worth quoting:
…I don’t know how they
were doing their payments but instead of paying the full amount of deductions
at source, they had paid the suppliers more than … Oh yes, that’s right. I
remember now, yes. It’s always the way it works, you know. They had paid the
suppliers, I think, a disproportionate amount – the pipeline supplier – a
disproportionate amount because if they did so, they would get, you know, a
discount and a much better deal on the pipeline.
So the DAS took a back
seat to that particular thing which was not the way we do things, and therefore
we immediately sat down, calculated what the discrepancy was and made the
correction.
And then at pages
163-165:
Without going into the
details, my understanding, my recollection is that the amounts were properly
calculated and tabulated but the remittances were not made a hundred percent
(100%). Why? Because we had a special deal, I would say, with the pipeline
supplier and that’s where things went wrong. I believe that they allocated some
of that money to save money on supplies rather than pay a hundred percent
(100%) of the deductions…
…but if the supplier
says you pay me in ten days and I’m going to knock off $1 M off your bill, then
all of a sudden, it becomes attractive for the project manager who’s trying to
… who actually gets paid on a bonus basis too, it becomes attractive to maybe
skimp on paying you DAS. Of course, that was not acceptable.
…So, when we got wind of
that, we pulled the plug on the management and we put things straight and
because we wanted to do things right…
[41] In response to the Steen’s two failures, Mr.
Matossian had also concluded, following a recommendation by Mr. Jordan, that voluntary disclosure would be appropriate to try to eliminate the penalties. However, since a CCRA auditor was
already on site in fall 1997
to audit DBI, CCRA did not permit Steen to make a voluntary disclosure. Since voluntary disclosure was not
possible, Mr. Matossian then asked Mr. Jordan to verify whether DBI was really in default, and if so, to what extent.
The following is how Mr. Matossian explained the result of this review at
pages 113‑114 of his testimony:
…And he [Mr. Jordan]
came up with no red light which doesn’t surprise me because of all the units
that we had, DBI was certainly the oldest one and the best oiled machinery that
we have in terms of payroll and accounting, and all that.
So then, the auditor
[from CCRA] who had been put there just to check everything, I guess, left, and
we were able to go to Steen to make the voluntary disclosure, which we
subsequently resolved. But just to tell you that in the process it so happened
that we had to find out what was going on in DBI because we had not had any red
light, and our investigation, as the auditor at the time…And we were quite
satisfied that looking, ourselves looking at our own books, we found no error,
no omissions, and we were also satisfied that the auditor who was there at the
time, by the time he left, he hadn’t found, I think, otherwise he would have
told us.
Mr. Jordan’s version was however a little different from that of Mr. Matossian.
His testimony
on this subject is worth quoting:
…So in that meeting
[late October, early November 1997], we were advised that Dominion Bridge Inc.
in Montreal was under the payroll withholding audit, so that being a sister
company, we could not take advantage of the voluntary disclosure. So I went
back to the office quite disappointed and let the time run. Then the auditor,
for whatever the reason was not coming back, so I went downstairs and inquired
with the plant personnel as to what the situation was. The lady in charge of
payroll advised me that we may have a problem but it would not be more than
$20,000. I talked to the plant controller, he told me the same thing and then
I told the V.P. Finance of Dominion Bridge Inc. and he had the same story.
So at this time, we
decided to call the tax auditor and asked him to come back and complete and
audit so we could get Dominion Bridge Inc. out of the way and proceed with
Steen Becker. So the answer that came back is that the auditor was assigned on
another file and he didn’t feel very well and he would come back when he would
get around to it. So we let the time slide…[we then] suggested [to Revenue Canada] that we would like to
take advantage of voluntary disclosure nevertheless.
Then the things went a
little bit sideways, for a lack of a better word, we were summoned to a meeting
in North York and there were six representatives of Revenue Canada and a
counsel from Justice Department so we kind of … Yes, we thought we were in a
little bit of trouble, which would be understandable under the circumstances.
So that started the process.
We met again three weeks
later and we came to an arrangement with Revenue Canada to settle the Steen Becker money
owed…
[42] These two testimonies clearly show that Mr.
Jordan’s investigation of DBI’s failure was not very probing. In fact, he
simply talked to three or four people from accounting. The person
responsible for pay had even told him that, contrary to what Mr. Matossian
believed, liability for DBI’s failure was under $20,000. The fact that the
failure was under the $100,000 threshold established by Mr. Matossian would
explain in part why Mr. Matossian testified that Mr. Jordan had not told
him about DBI’s failure.
[43] Appellants Marengère and Amyot were finally
informed of the facts surrounding the voluntary disclosure of Steen around the
same time as Mr. Matossian, in fall 1997.
Thus, DBI had already failed to remit payments three times by the time when the
Appellants were informed that it was impossible to make a voluntary disclosure.
That is not the issue, however. As we have already seen, Mr. Matossian was
aware of Steens’ failures well before DBI failed to make remittances (the
testimonies do not allow for any other conclusion). As for Mr. Marengère,
given his daily relationship with Mr. Matossian and the fact that they
discussed all the problems, including those related to deductions and
remittances, it must be concluded that he was aware of Steen’s failures well
before those of DBI (the testimonies do not allow any other conclusion). For
Mr. Amyot, although it is harder to draw a conclusion regarding his
knowledge of this subject, it is clear that he should have been aware of it,
that he should have at least asked questions. Since Messrs. Marengère and Amyot
did not testify at the trial, it is now difficult to come to the opposite
conclusion.
Position of the Appellants
[44] The Appellants held that they should be allowed
to rely on those who were responsible for the day-to-day management of Cedar
and its subsidiaries (the “group”). They claim that the accounting and
compensation services of the group were well structured and their staff was
competent. Furthermore, these services were supervised by Mr. Jordan, who
informed Mr. Matossian of the problems he deemed important. It was in this
capacity that Mr. Jordan was instructed by Mr. Matossian to do an internal
audit of DBI’s books when he learned that Steen, at the time had failed to make
remittances, could not make a voluntary disclosure since DBI was being audited.
This internal audit of DBI apparently, according to the Appellants, did not
reveal any failure to deduct or remit the amounts owing to the Respondent,
which reassured them. According to the Appellants, these actions were more than
sufficient to fulfil their duty of due diligence following the first two
failures by Steen. Finally, they claimed that directors of such complex
corporations should not be required to micro-manage their corporations.
Position
of the Respondent
[45] The Respondent held that the
Appellants had only reacted to the problems when they occurred and that they
had never really tried to prevent subsequent problems. Furthermore, according
to the Respondent, the Appellants did not want to be informed of problems
deemed less important, thus creating a systematic problem for communicating
problems.
Analysis
[46] What is the scope of the due
diligence requirement? Robertson J.A. said the following on the subject in Soper
v. Canada, [1998] 1 F.C. 124 (F.C.A.):
[50] In
order to satisfy the due diligence requirement laid down in subsection 227.1(3)
a director may…take "positive action" by setting up controls to
account for remittances, by asking for regular reports from the company's
financial officers on the ongoing use of such controls, and by obtaining
confirmation at regular intervals that withholding and remittance has taken
place as required by the Act: see Information Circular, No. 89-2…at paragraph
7.
[51]
Likewise, some commentators have advised directors that, if they wish to be
able to rely successfully on the due diligence defence, it would be wise for
them to consider undertaking a number of "positive steps" including,
in certain circumstances, the establishment and monitoring of a trust account
from which both employee wages and remittances owing to Her Majesty would be
paid: see e.g. Moskowitz, supra, at pages 566-568.
[52] While
such precautionary measures may be regarded as persuasive evidence of due
diligence on the part of a director, in my view, those steps are not necessary
conditions precedent to the establishment of that defence. This is particularly
true with respect to the establishment of a separate trust account for source
deductions to be remitted to the Receiver General. It is difficult to hold
otherwise given the fact that Parliament abolished that express requirement for
the purpose of achieving other legislative goals. Above all, a clear dividing
line must be maintained between the standard of care required of a director and
that of a trustee. Accordingly, an outside director cannot be required to go to
the lengths outlined above. As an illustration, I would not expect an outside
director, upon appointment to the board of one of Canada's leading companies, to go directly to
the comptroller's office to inquire about withholdings and remittances.
Obviously, if I would not expect such steps to be taken by the most
sophisticated of business-persons, then I would certainly not expect such
measures to be adopted by those with limited business acumen. 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…
[53] 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, apprised of the possibility of such a problem is where the
company is having financial difficulties… (My emphasis.)
…
[56] It is
important to note that whether a company is in serious financial difficulty,
such as to suggest a problem with remittances, cannot be determined simply
by the fact that the monthly balance sheet bears a negative figure. For
example, many firms operate on a line of credit to deal with fiscal
fluctuations. In each case it will be for the Tax Court Judge to determine
whether, based on the financial information or documentation available to the
director, the latter ought to have known that there was a problem or potential
problem with remittances. Whether the standard of care has been met, now
that it has been defined, is thus predominantly a question of fact to be
resolved in light of the personal knowledge and experience of the director at
issue. (My emphasis.)
[47] A review of these passages leads to
the following comments:
(i) First,
no one could deny that that to satisfy the due diligence requirements, the
Appellants could take “positive steps” by setting up controls to account for
remittances (see Soper, supra, at paragraph 50). However,
these controls should not contain inherent flaws that prevent a director form
being informed of problems related to deductions and remittances. This is
clearly what happened in the case at bar when everyone in the group followed
the rule by which no problem should be brought to the directors’ attention
unless it reached a significant and undefined threshold. I include the three
Appellants in this group, as they know or should have known that this threshold
existed. In order to solve the problem, the directors should not have imposed
such a threshold. Then, the directors should have made sure that everyone else
was aware that there was no threshold. The Appellants could have also followed
the advice of Robertson J.A. in Soper, at paragraph 50, “by asking for regular reports
from the company's financial officers on the ongoing use of such controls, and
by obtaining confirmation at regular intervals that withholding and remittance
has taken place as required by the Act.”
(ii) Second, it is clear
from reading paragraphs 51 to 53 of Soper that, although directors are
not required to take overly rigorous preventative steps, as soon as a director
(even an outside director) becomes aware of a possible problem with deductions
and remittances, or he suspects or should have known that the controls are
defective, he must take action to prevent any future failure. In other words,
when a director becomes aware of a failure, even though he cannot correct this
failure and thus avoid the liability set out in subsection 227.1(3) of the
Act, he will be allowed to rely on the due diligence defence for any subsequent
default if he “act[s] with due diligence to correct
such default [the first failure] and prevent its recurrence” (see McDougall v. Canada (Attorney
General), 2002 FCA 455, at paragraph 2 (F.C.A.)). See also Hanson v.
Canada, No. A-792-96, October 2, 2000, at paragraph 7 (F.C.A.); Cadrin
v. Canada, No. A-112-97, December 17, 1998, at
paragraphs 5 to 8; and Cameron v. Canada, 2001 FCA 208, at paragraphs 7
and 8 (F.C.A.), where the Federal Court of Appeal ruled on the obligation of an
outside director to not act passively.
In the case at bar, neither the Appellants, nor Mr. Jordan had tried to correct
the controls of the group following Steen’s failures in order to avoid any
future failure. It should not be forgotten that not only were the controls set
up for Steen, but there were for all the corporations in the group. The
Appellants had not even delegated the responsibility for correcting these
controls. In fact, the testimonies of Mr. Matossian and Mr. Jordan indicate that the role of Mr. Jordan was to find problems and solve them, not to suggest
corrective actions for the controls and measures once a problem was identified.
The internal audit of DBI (which I would describe as superficial) carried out
by Mr. Jordan very clearly shows, in my opinion, that
the modus operandi of the organization was to react rather than to
prevent. Of course, the Appellants claimed that they did not only react to
problems, but rather they had taken corrective actions to prevent problems. In
fact, did Mr. Matossian not testify that as soon as he became aware that
management at Steen had preferred to pay the suppliers first in order to save
money and increase their bonuses, he “pulled the plug on the management and put
things straight.” However, his testimony was silent with respect to the
corrective actions that were actually taken by the Appellants to prevent such
problems. In any case, to ensure that the controls in place were more
effective, for all the corporations in the group, the Appellants would have had
to react in a more significant manner than simply dismissing managers at Steen.
[48] I will close by answering the question that
Bowman A.C.J. often asks when dealing with issues of due diligence: what could the Appellants
have done that they did not do? See McKinnon v. The Queen, No.
2001-2757(IT)G, December 3, 2003, 2004 DTC 2049, at
paragraph 16 (T.C.C.); Fremlin v. The Queen, No. 2001‑3060(GST)I,
May 24, 2002, [2002] T.C.J. No. 268, at paragraph 32 (QL) (T.C.C.); and Mosier
v. Canada, No. 96-3504(GST)G, October 10, 2001, [2001] T.C.J. No. 692, at
paragraphs 33‑35 (QL) (T.C.C.). First, eliminate the threshold.
Second, inform everyone involved of the importance of respecting the
requirements of tax laws. Third, force the employees involved to inform the
directors of flaws in the controls in place so that the directors can ensure
that the appropriate corrective measures are taken. Fourth, be regularly
informed of the status of deductions and remittances, either by asking for
reports on the subject or regularly obtaining confirmations from finance
officers in the group that the deductions and remittances have been made in
accordance with the Act and the EIA, or by taking any other acceptable steps. I
believe that the Appellants should have done these things. It is not asking the
impossible or for perfection. In light of Smith v. The Queen, F.C.A. No. A‑154‑00,
March 26, 2001, 2001 DTC 5226, at paragraphs 31 and 32, and Cameron, supra,
theses measures seem quite reasonable to me in the case at bar.
Signed at Ottawa,
Canada, this 23rd day of February 2005.
Bédard
J.
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