Date: 19991123
Dockets: 98-2659-IT-I; 98-2660-GST-I
BETWEEN:
HELEN WHITEHOUSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
RIP, J.T.C.C.
[1] The issue in these appeals is whether Ms. Whitehouse is
vicariously liable under the provisions of subsection 227.1(1) of
the Income Tax Act ("ITA") and subsection
323(1) of the Excise Tax Act ("ETA")
(Part IX) for the failure by Whitehouse & Brodmann Trucking
& Excavation Limited ("Corporation") to remit to
the Receiver General for Canada source deductions in respect of
wages paid to its employees and net Goods and Services Tax
("GST") respectively, including penalties and
interest.
[2] Subsection 153(1) of the ITA imposes a duty on
employers to withhold taxes and other source deductions from an
employee's salary and remit such amounts to the Receiver
General for Canada. Subsection 227.1(1) of the ITA makes
the directors of a corporation that failed to remit amounts
jointly and severally liable with the corporation to pay the
amounts and any interest and penalties. Corporate directors are
freed of their joint and several liability for the
corporation's non remittance of source deductions by
subsection 227.1(3) if they can establish that they
"exercised a degree of care, diligence and skill to prevent
the failure that a reasonably prudent person would have exercised
in comparable circumstances". Section 323 of the ETA
is analogous to section 227.1 of the ITA; subsection
228(2) of the ETA requires a person to file a return under
Division V of Part IX of the ETA to remit an amount of net
GST to the Receiver General for Canada.
[3] The Corporation was incorporated in 1994 by the appellant,
Mr. Martin Brodmann and Mr. Kevin Whitehouse, the
appellant's son. Each held one share in the Corporation. Mr.
Brodmann was a director and president; the appellant was a
director and secretary. Mr. Kevin Whitehouse was neither an
officer nor a director.
[4] When the Corporation was incorporated, it acquired the
equipment and trucks used by the appellant's former husband
in the business of road construction and excavation. The
Corporation also assumed Mr. Whitehouse's debt originally
incurred to purchase the equipment. (Mr. Whitehouse and the
appellant were divorced in 1994.) Ms. Whitehouse had personally
guaranteed loans of approximately $10,000 taken by Mr. Whitehouse
with a credit union to purchase the equipment. The company also
borrowed money from the Bank of Nova Scotia and Ms. Whitehouse
guaranteed the loan.
[5] One of the reasons Ms. Whitehouse assisted in
incorporating the Corporation was to insure her son's
employment in a job he enjoyed. Mr. Kevin Whitehouse
had been employed by her former husband's business and she
"feared" her son would be unemployed. Apparently, Ms.
Whitehouse's former husband had been having
"difficulty" with the business and "it looked like
the company would fail". As well, Ms. Whitehouse wanted to
ensure that there was a source available to repay the loan to the
credit union.
[6] Ms. Whitehouse knew Mr. Brodmann as a result of her
husband performing certain services for Mr. Brodmann. Mr.
Brodmann carried on a "road development and land
development" business. Mr. Brodmann moved to Nova Scotia
from Switzerland in about 1991. According to Ms. Whitehouse he
had "overseas contacts" and could give the Corporation
development work. Ms. Whitehouse had met Mr. Brodmann soon
after his arrival in Nova Scotia and they became friends.
[7] Ms. Whitehouse has been employed for over 31 years by a
manufacturer of hardboard and at the time of trial was that
company's Human Resources Manager. That company has 350
employees. The appellant is in charge of administering employee
benefits and recruitment, among other things. Hers is a full time
job and she had neither the interest nor the inclination to
become involved in the business of the Corporation. She was a
director of the Corporation but, she insisted, she had no
duties.
[8] The only reason the appellant was "on paper" and
was named director of the Corporation was to make sure her son
would have work and she did not lose any money on the equipment
acquired by the Corporation from her former husband. She was not
involved in the "day-to-day" business of the
Corporation, she never attended any directors meetings, if any
were held, and she was never consulted by management.
[9] The Corporation's business was managed by Brodmann
Management, either a sole proprietorship carried on by, or a
corporation owned by, Mr. Brodmann. Brodmann Management was
responsible for the day-to-day operations of the Corporation,
including all dealings with customers and employees. Mr. Brodmann
had sole cheque signing authority for the Corporation, the
appellant assumed at trial. She stated she did not know where the
Corporation maintained its regular bank account.
[10] Ms. Whitehouse had no knowledge of the Corporation's
failures to remit source deductions and GST until she was
assessed in December 1996. She was unaware that the Corporation
was in arrears to Revenue Canada before December. When she
confronted Mr. Brodmann, he told her, she testified, not to
worry: the bills would be paid. She never asked specific
questions to Mr. Brodmann concerning payment of source
deductions or GST. She assumed Brodmann Management was current
with the payments. When she asked Mr. Brodmann or her son
how things were going, she said she was told "things were
good".
[11] The Corporation had ceased operations during the first
quarter of 1996. As far as Ms. Whitehouse had been aware, the
Corporation was "selling off" its equipment to pay off
the bank loan. In March 1996, she resigned as director because
she "wanted to stop being part" of the Corporation. She
was not at the time aware of her potential statutory tax
liabilities. In April 1996, the Bank of Nova Scotia sued Ms.
Whitehouse, as well as her former husband, to recover on its
loan.
[12] Before 1994, Ms. Whitehouse had not been a director of
any corporation. She had no idea of what a director's
responsibilities were, or what a director's liability was
under the ITA and ETA. She never made any inquiries
of her responsibility as director. As director she did not think
she had to do anything since Brodmann Management was managing the
Corporation.
[13] Ms. Whitehouse acknowledged she knew a corporation had to
withhold and remit source deductions and pay GST.
[14] The appellant knew little, if anything, about Mr.
Brodmann's business. Mr. Brodmann did prepare financial
projections for the Corporation before commencing business and,
Ms. Whitehouse stated, these projections were used to obtain the
loan with the Bank of Nova Scotia that Ms. Whitehouse
guaranteed.
[15] Respondent's counsel relied on the reasons for
judgment in Stuart v. M.N.R.,[1] where a wholly passive and
unassertive taxpayer who never inquired about the
responsibilities of directors was liable under section 227.1 of
the ITA. The trial judge referred to Black v. The
Queen[2] for
the proposition that nothing in the language of section 227.1
suggests the existence of a legislative intention to offer relief
to a director who fails to act because he or she is ignorant of
and indifferent to his or her responsibilities and those of the
company.
[16] Counsel for both parties referred the Court to Soper
v. The Queen[3]
where Robertson J.A. summarized his findings in respect of
subsection 227.1(3) of the ITA as follows:
29. ... 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).
30. 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
negligence 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".
[17] It is quite obvious that Ms. Whitehouse was an
"outside director". The affairs of the Corporation were
being run by Mr. Brodmann and I doubt he would have tolerated any
interference by Ms. Whitehouse who had no experience in the
business, notwithstanding that she was a Human Resource Manager
responsible for employee benefits, among other things, for her
employer's 350 employees.
[18] Ms. Whitehouse knew very little of Mr. Brodmann's
business and did not believe it was necessary to make any
inquiries. She considered themselves friends and, rightly or
wrongly, relied on his purported expertise and contacts to give
him full rein to operate the Corporation. She placed her full
confidence in Mr. Brodmann and she knew that source
deductions and GST had to be paid regularly. She never inquired
if these payments where being made as required. Ms. Whitehouse
was satisfied with the reply that all was well when she would
make a general inquiry.
[19] Whether a standard of care by a director has been met for
purposes of subsections 227.1(3) and 323(3) is predominantly a
question of fact to be resolved in the light of the personal
knowledge and experience of the director at issue.[4] An entirely passive
approach on the part of a director may not help that
director's defence of an assessment but, unless there is
reason for suspicion, the director is permitted to rely on the
day-to-day corporate managers to be responsible for payment of
statutory debt obligations. An outside director who knows or
suspects or ought to know something is amiss must take positive
steps to try to remedy the situation.[5] A director of a company who never put
his or her mind to exercise his or her duty to prevent the
company from failing to remit source deductions and pay GST as
required by section 227.1 of the ITA and section 323 of
the ETA respectively and has remained completely
uninterested and passive with respect to his or her duty is going
to be vicariously liable for the payments required to be made by
the company.[6]
[20] Both counsel also discussed the reasons in Hevenor v.
Canada.[7] In
Hevenor an elderly taxpayer became the sole director of
his son's corporation as a favour for his son. He did not
fully understand his responsibilities and liabilities as a
corporate director and was not involved in the decisions or
operations of the company. Had he been shown financial
statements, he would not understand them. His degree of care as a
director was limited by his lack of skill and his appeal from an
assessment pursuant to section 323 of the ETA was
allowed.
[21] In many ways Ms. Whitehouse finds herself in the same
situation as Mr. Hevenor did: both were directors as a
favour for their children, both assisted in financing the
particular business, neither was involved in the day-to-day
operations of the business, neither company appears to have had
any meetings of shareholders or directors, neither parent knew of
an impending financial crisis, neither parent was aware of the
liabilities and responsibilities of a director. On the other hand
Ms. Whitehouse knew that source deductions had to be paid on a
regular basis and that GST was payable.
[22] I cannot accept the respondent's submission that Ms.
Whitehouse was "more comfortable in the business world"
than Mr. Hevenor could be said to be and "possessed a
capacity for greater understanding of business matters" than
Mr. Hevenor. Ms. Whitehouse's so-called business
experience was as an employee of a company. She was an
administrator, not a business woman who made decisions. She
simply executed the work assigned to her. My impression of her is
that she was probably a valued employee for what she did but no
more. Ms. Whitehouse was not a person who made decisions or
developed her employer's policies.
[23] Ms. Whitehouse's ignorance was not deliberate and did
not result from wilful negligence. She was a mother who, like Mr.
Hevenor, wanted the best for her son and relied on a person she
respected to operate a business that would hopefully pay the
debts assumed and benefit her son. She acted as most mothers
would act in similar circumstances. There is no evidence that Ms.
Whitehouse's lack of experience as a director and her
ignorance of what the office of director entailed could have been
remedied by her experience as an employee of her employer. I
cannot find that her situation is so different from Mr.
Hevenor.
[24] The appeals are allowed and the assessments are vacated.
The appellant is entitled to her costs for preparation of the
notices of appeal but only one set of costs for preparation and
conduct of the hearing and taxation, if any.
Signed at Ottawa, Canada, this 23rd day of November 1999.
"Gerald J. Rip"
J.T.C.C.
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