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Citation: 2003TCC289
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Date: 20030617
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Docket: 2001-453(IT)G
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BETWEEN:
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STEVEN L. CLEMENTS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bonner, T.C.J.
[1] The Appellant appeals from
assessments imposing liability under s. 227.1 of the Income
Tax Act (the "Act"), s. 21.1 of the
Canada Pension Plan (CPP) and s. 83 of the
Employment Insurance Act (EI). The assessments are
based on a finding that SLC Cartage Inc. (SLC) fail to remit to
the Receiver General amounts deducted or withheld from its
employees' salary or wages for the months of January,
February, March and April 1998.
[2] The statutory provisions giving
rise to the obligation of SLC to deduct or withhold and to remit
are s. 153(1) of the Act, s. 21(1) of the CPP and
s. 82(1) of the EI. Where there has been a failure by a
corporate employer to comply with its obligations under those
provisions "... the persons who were the directors of the
corporation at the time when the failure occurred..." are
made jointly and severally liable with the corporation to pay to
Her Majesty the amount which the employer should have paid.[1]
[3] There are two issues in this
case:
a) Did SLC fail to remit
to the extent found by the Minister on assessment?
b) Did the Appellant exercise
the degree of care, diligence and skill to prevent the failure
that a reasonably prudent person would have exercised in
comparable circumstances? If and to the extent that he did, he is
relieved of liability by s. 227.1(3) of the Act.
[4] In Smith v. R., [2001]
2 C.T.C. 192, the Federal Court of Appeal discussed the
legislative purpose underlying the directors' liability
provisions of the Income Tax Act and Excise Tax
Act. At paragraphs 6 and 7, the following is said:
"[6] The directors'
liability provisions were enacted to strengthen the Crown's
ability to enforce the statutory obligation imposed on certain
taxpayers to remit taxes payable by other parties, such as tax
withheld at source from wages paid to employees, and net GST
collected from customers. Normally, the Crown's remedies
against a corporation that fails to remit these third party taxes
would be limited to the corporation's assets. That
is a necessary incident of separate corporate
personality. However, it was perceived that a
corporation, particularly a corporation in financial difficulty,
might prefer to default on its obligation to remit taxes, in
order to satisfy creditors whose claims were more immediately
pressing. It was apparently thought necessary to enact
legislation that would deter corporations from making such a
choice.
[7] Consequently,
subsection 227.1(1) of the Income Tax Act and subsection
323(1) of the Excise Tax Act were enacted to impose
liability, subject to certain conditions, on the directors of a
corporation that had failed to remit tax collected from others:
Soper v. R., (1997), [1998]
1 F.C. 124, 215
N.R. 372, 149
D.L.R. (4th) 297, [1997]
3 C.T.C. 242, 97
D.T.C. 5407 (Fed. C.A.). This is based on the
presumption that a decision by a corporation to default on its
remittance obligations would originate with the directors:
Kalef v. R. (1996), 194 N.R. 39, 39
C.B.R. (3d) 1, [1996]
2 C.T.C. 1, 96
D.T.C. 6132 (Fed. C.A.)."
What is said there applies with equal force to the analogous
provisions found in the EI and CPP.
[5] In Smith, the Federal Court
of Appeal provided in paragraphs 9 to 14 of its reasons a useful
outline of the main elements of the due diligence defence:
"[9] The Soper
decision, supra, established that the standard of care
described in the statutory due diligence defence is substantially
the same as the common law standard of care in City Equitable
Fire Insurance Co., Re (1924), [1925] 1 Ch. 407 (Eng.
C.A.). It follows that what may reasonably be expected
of a director for the purposes of subsection 227.1(1) of the
Income Tax Act and subsection 323(1) of the Excise Tax
Act depends upon the facts of the case, and has both an
objective and a subjective aspect.
[10] The subjective aspect of
the standard of care applicable to a particular director will
depend on the director's personal attributes, including
knowledge and experience. Generally, a person who is
experienced in business and financial matters is likely to be
held to a higher standard than a person with no business acumen
or experience whose presence on the board of directors reflects
nothing more, for example, than a family
connection. However, the due diligence defence
probably will not assist a director who is oblivious to the
statutory obligations of directors, or who ignores a problem that
was apparent to the director or should have been apparent to a
reasonably prudent person in comparable circumstances (Hanson
v. R. (2000), 261 N.R. 79, [2000] 4 C.T.C. 215, 2000
D.T.C. 6564 (Fed. C.A.)).
[11] In assessing the objective
reasonableness of the conduct of a director, the factors to be
taken into account may include the size, nature and complexity of
the business carried on by the corporation, and its customs and
practices. The larger and more complex the business, the more
reasonable it may be for directors to allocate responsibilities
among themselves, or to leave certain matters to corporate staff
and outside advisers, and to rely on them.
[12] The inherent flexibility of
the due diligence defence may result in a situation where a
higher standard of care is imposed on some directors of a
corporation than on others. For example, it may be
appropriate to impose a higher standard on an "inside
director" (for example, a director with a practice of
hands-on management) than an "outside director" (such
as a director who has only superficial knowledge of and
involvement in the affairs of the corporation).
[13] That is particularly so if
it is established that the outside director reasonably relied on
assurances from the inside directors that the corporation's
tax remittance obligations were being met. See, for example,
Cadrin c. R. (1998), 240
N.R. 354, [1999]
3 C.T.C. 366, 99 D.T.C. 5079 (Fed. C.A.).
[14] In certain circumstances,
the fact that a corporation is in financial difficulty, and thus
may be subject to a greater risk of default in tax remittances
than other corporations, may be a factor that raises the standard
of care. For example, a director who is aware of the
corporation's financial difficulty and who deliberately
decides to finance the corporation's operations with
unremitted source deductions may be unable to rely on the due
diligence defence (Ruffo c. R., 2000
D.T.C. 6317 (Fr.) (Fed. C.A.)). In every case,
however, it is important to bear in mind that the standard is
reasonableness, not perfection."
[6] At the hearing of the appeal
evidence was given by the Appellant and by his sister Joan
Michelle Clements, who was responsible for the accounting,
payroll and government remittance functions of SLC at the
relevant time.
[7] SLC was incorporated in April of
1990. At all material time, the Appellant was its sole
shareholder and director. It carried on a trucking business. Its
work consisted almost exclusively of delivering goods for Sears
Canada (Sears). It had about 38 employees in early 1998.
[8] The Appellant has a high school
education followed by a two-year diploma course which
qualified him as a lab technician. He has driven trucks since
1983. During the period 1986 to 1988, the Appellant worked as an
employee of a company called Canada Cartage. It was engaged in
the delivery of goods for Sears. In 1988 there was a falling out
between Canada Cartage and Sears and the Appellant became
involved in freelance delivery for Sears. Subsequently SLC was
incorporated and it commenced to work for Sears. The relationship
between SLC and Sears was terminated in 1995. In June of 1997 a
new delivery contract was formed between SLC and Sears. This
contract appears to have been the source of almost all of
SLC's business during the relevant period.
[9] The financial position in June
1997 of the Appellant and SLC appears to have been precarious.
The Appellant testified that his credit at the time was nil.
Prompt payment of money earned under the Sears' contract
appears to have been essential to the financial well-being
of SLC. The contract called for Sears to pay SLC on the day
following presentation of an invoice.
[10] It was the Appellant's evidence
that SLC's failure to remit source deductions was caused by
financial difficulties resulting from a departure from or change
in the time of payment provisions of the delivery contract.
According to the Appellant, Sears warned in February of 1998 that
it intended to commence making payments 30 days following
receipt of SLC's invoice.
[11] Sears paid SLC's invoice rendered
March 4, 1998 but made no further payment until April 20.
According to the Appellant, the March 15, 1998 remittance to the
Receiver General in respect of February 1998 source deductions
could not be made because SLC had no money. He testified that he
told Sears that SLC would file for bankruptcy if Sears did not
pay and that Sears "started taking over our
people".
[12] It may be noted here that while the
change in the timing of payments by Sears to SLC may have made it
difficult for SLC to remit in March 1998 the February source
deductions, that change cannot account for SLC's failure to
remit in February 1998 the source deductions which had been made
in January.
[13] Evidence given by Joan Clements made it
clear that SLC was in a continuous state of financial crisis from
June of 1997 until May of 1998 when the company became bankrupt.
She said that "we were always scrounging" and that
Sears had failed to advance to SLC the start-up funds which it
had promised. She described SLC as a small company which was
"starving to start with".
[14] Both the Appellant and Ms. Clements
agreed that the February 1998 cheque to the Receiver General to
remit January source deductions was not signed because there were
not sufficient funds to cover it. The Appellant claimed that he
had been told that the payment was made but he was unable to
identify the person who told him. Two persons had authority to
sign SLC's cheques, the Appellant and his sister Debby Best.
Ms. Best was not called as a witness. In my opinion it is most
unlikely that the Appellant believed that SLC, a company which
for some time had been in perilous financial condition, made the
February 15 payment. I am not convinced that the Appellant
was misled or in any way prevented from discovering the truth. I
reject the suggestion that the Appellant was not aware of any
problem in January and February and that he did not learn of a
source deduction shortfall until March.
[15] There is evidence that in February
payments were made by SLC to creditors other than Her Majesty.
SLC did pay its landlord. It also paid members of the
Appellant's family to whom SLC was indebted.
[16] The Appellant did acknowledge that he
realized, just before the middle of March 1998, when the source
deductions for February were to be remitted, that there would be
a shortfall. He stated that at that time he knew that the company
would be "folded". There is no evidence to support a
conclusion that the Appellant made any effort to gather funds to
make the March 15 remittance to the Receiver General. The
Appellant said that he thought it best to let the trustee in
bankruptcy handle the remittance of source deductions and that
SLC's receivables at the time were sufficient to permit the
trustee to pay the company's debts. He expressed the view
that the shortfall in payment by the trustee to the Receiver
General was attributable to fees charged by the trustee in
bankruptcy.
[17] In his submissions with respect to the
due diligence defence which arises under s. 227.1(3) of the
Act, counsel for the Appellant referred to the objective
and subjective elements discussed by the Federal Court of Appeal
in Neil Soper v. the Queen, 97 DTC 5407. Counsel submitted
that the Appellant had no formal business or accounting training,
little formal education and little business experience. He argued
that, given those subjective limitations, the Appellant met the
statutory standard by retaining his sister Joan as bookkeeper or
accountant and by holding weekly meetings in order to discuss
problems with the business. His submission was that the failure
flowed from matters beyond the Appellant's control.
[18] It is difficult to find support in the
evidence for counsel's submissions. I formed the opinion
that the Appellant was entirely capable of managing and
controlling the business of SLC. The company was of modest size
and the task was not formidable. The Appellant possessed
post-secondary education. His experience in the trucking business
was considerable. The Appellant had the able assistance of his
sister Joan who operated a computerized accounting system capable
of furnishing the Appellant with up-to-date
information on financial matters including the state of the
payroll.
[19] I cannot accept the suggestion that the
failures to remit were caused by circumstances beyond the
Appellant's control. He was in charge of a business that was
in evident financial difficulty. The risk of default in remitting
source deductions was obviously great. The Appellant's access
to the facts was unimpaired. As sole director and shareholder he
had the power to take effective steps to prevent failures to
remit. I have no doubt that he had the knowledge and skill
required to appreciate the gravity of the situation and to take
effective measures to remit as required. In the circumstances the
Appellant was under an obligation to take positive steps to
prevent failure. There is simply no credible evidence that the
Appellant addressed the problem until mid-March 1998 when he
decided to allow SLC to go bankrupt and to leave the payment of
source deductions to a trustee in bankruptcy. That decision can
hardly be characterized as an effort to prevent failure. It does
not even qualify as a practical plan for rectifying prior
failures for there is simply no evidence to support the
Appellant's assumption that the trustee would be provided
with assets adequate to pay the arrears.
[20] In Soper v. the Queen
(supra), Marceau, J.A. delivered brief reasons concurring
in the result. At page 5420 he spoke of the duty imposed upon
directors by s. 227.1. He said:
"I simply cannot imagine that such a duty may ever be
seen as having been fulfilled by a director who, as here, has
never put his or her mind to the requirement and has remained
completely uninterested and passive with respect to it."
In my opinion the Appellant was "completely uninterested
and passive" with respect to the duty to act reasonably to
prevent the failures in this case.
[21] The assessments result from the failure
of SLC to remit source deductions for the period from January
1998 to the end of April. The evidence of both the Appellant and
of Joan Clements establishes that SLC did not have the funds
required to pay salary or wages for April of 1998. The evidence
suggests that Sears "took over" SLC's employees
early in April in order to prevent an interruption in service to
its clients. SLC was under no obligation to withhold or remit in
respect of the salary or wages which it did not pay. In
consequence, the Appellant cannot be vicariously liable with
respect to failures to remit for the month of April.
[22] Some evidence was adduced regarding the
amount of April wages. Counsel for the Appellant produced a
calculation, Exhibit A-6, purporting to list $42,901.36 in unpaid
wages for the period March 29 to April 30, 1998. That calculation
was not shown to be reliable. The author was not called to
testify. Exhibit A-7, containing a calculation made by the
Ontario Department of Labour showed unpaid wages for April to be
$20,334.80 and counsel for the Respondent conceded that SLC was
not liable to pay source deductions on this amount. As I see it,
both calculations are beside the point. What is relevant is the
fact that SLC did not have the funds to pay and did not pay any
wages during April. The Minister of National Revenue is, I
assume, capable of recalculating the assessments to eliminate any
amount included in respect of the wages which SLC did not pay in
April.
[23] Judgment will therefore issue allowing
the appeals and referring the assessments back to the Minister of
National Revenue for reassessment to delete liability in respect
of wages erroneously found to have been paid to SLC's
employees for the month of April 1998. Success was divided. There
will be no order as to costs.
Signed at Vancouver, British Columbia, this 17th day of June
2003.
T.C.J.
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