Date: 19990315
Docket: 96-436-IT-G; 96-437-IT-G
BETWEEN:
ROGER P. WESTERN, RICHARD ROGER WESTERN,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Rip, J.T.C.C.
[1] Roger P. Western and Richard Western appeal income tax
assessments issued against them by the Minister of National
Revenue ("Minister") under section 227.1 of the
Income Tax Act ("Act") on the basis that
each of them was a director of King Cash Register Systems Ltd.
("King") at the time that the corporation failed to
deduct, withhold or remit amounts of tax with respect to
salaries, wages or other remuneration paid to its employees in
1988, 1989 and 1990 as required by subsection 153(1) of the
Act. Each of the appellants state that he exercised the
degree of care, diligence and skill to prevent the failures of
King to remit tax that a reasonably prudent person would have
exercised in comparable circumstances and therefore, in
accordance with subsection 227.1(3) each is not liable for the
failures of King to remit the tax.
[2] The appeals of the appellants were heard on common
evidence. However not all the facts each of the appellants relies
on in his claim that he exercised due diligence in accordance
with subsection 227.1(3) are similar.
[3] Roger Western is the father of Richard Western. At time of
trial he was 66 years old. Roger Western commenced working
in 1951 for National Cash Register ("NCR") where he was
employed for twenty years. He worked as a production manager,
equipment analyst and finally in sales. He left NCR in 1974 to
sell life insurance but returned to NCR two years later. After
two and a half years at NCR he started a business with Richard
called Direct Cash Register Sales Ltd. After four or five years a
former colleague in Vancouver asked him to represent his product
in Ontario and for this purpose King was incorporated in
1981.
[4] When Direct Cash Register Sales Ltd. was in operation,
Richard Western was president of the corporation and was in
charge of its administration. Roger Western was responsible
for selling product. He had no experience in administrative
matters. All banking and accounting matters were the
responsibility of Richard. The appellants followed a similar
practice with King. Roger Western was in charge of sales,
marketing and dealing with customers. If there was a problem with
a customer's account Roger Western would communicate with the
customer to clear up any conflict, this was the extent of his
administrative functions. Richard Western was in charge of all
administrative matters. His father was not interested in, nor was
he experienced in, administration or bookkeeping. Richard Western
was in charge of withholding source deductions and making
remittances to Revenue Canada. While a bookkeeper would have
calculated the amounts of the source deductions under Richard
Western's supervision, Richard Western would ensure that the
payments were made.
[5] The appellants obtained a line of credit from the Toronto
Dominion Bank for King's operations. The line of credit was
secured by guaranteed investment certificates owned by the
Westerns and which the Westerns had purchased personally with
funds borrowed from the bank. The security for the personal loans
was the home of each appellant. Roger Western declared "all
I own" was used as collateral to the bank.
[6] While King had a difficult year in 1983, it recovered and
was successful in 1985 and 1986. After 1986 there were problems,
Richard Western recalled. Changes in technology were bringing
down prices of cash registers and competition was increasing. The
bulk of the company's income was now from the service and
maintenance side of the business. Sales were diminishing.
[7] Richard Western recalled that in the past the
company's profits and losses fluctuated with each quarter.
The quarters before Christmas and during the summer months were
weak but the spring and fall quarters were profitable. Starting
in the fall of 1989 there was a slow down that continued into
December and into 1990. Usually, after Christmas, there was an
increase in business but not in 1990. There was talk in the media
of a recession and to many potential customers the acquisition of
a cash register was discretionary. At first Richard Western
thought the poor sales in January 1990 were nothing to get overly
excited about but they continued into February and March.
Business "just wasn't there".
[8] Richard Western stated that he first realized that there
might be a major problem sometime in the fall of 1989. By
February of 1990 he realized the continuing downturn in sales was
something different from the traditional downturns. For example,
he stated that in late March or early April he had a list of ten
prospective customers for product but the company was not able to
sell product to any one of them. Then he "really knew a
major problem existed". He said that the company could have
weathered one or two bad months but did not have the financial
wherewithal to endure three, four or five bad months. King
terminated business in April 1990.
[9] King remitted regular source deductions in September,
October, November and December 1989. Revenue Canada had audited
the company during the summer of 1989 and discovered that the
company was in arrears in the amount of approximately $17,000.
King and Revenue Canada agreed to a repayment schedule whereby
King would pay $2,300 immediately, then forward to Revenue Canada
three monthly cheques in the amount of $5,000 each. The first two
$5,000 cheques cleared the bank but the third cheque, payable in
December 1989, did not. From January to April 1990 King remitted
no source deductions to Revenue Canada.
[10] By the beginning of 1990, Richard Western estimated, King
had utilized approximately 98 percent of its line of credit with
the bank and had no additional cash on hand. He complained that
the bank was becoming "more difficult since other
businesses, not only that of King, were having problems". In
1990 the company's cash flow was primarily from services
rendered to its customers.
[11] Richard Western conceded that 1989 was not the first time
the company had been audited or that the company was in arrears
for payment of source deductions or that the company had to enter
into arrangements for payment of arrears with Revenue Canada.
But, he stated, in the past the company was able to live up to
the arrangements because a bad quarter was usually followed by a
good quarter and there was money available to make payments. But
after December 15, 1989 no remissions were made to Revenue Canada
"because we did not have the money". After King had
failed to make various remissions Richard Western instructed the
company's accountant to write Revenue Canada in an attempt to
come to some kind of accommodation.
[12] Richard Western stated that in the fourteen to fifteen
years that he had been in business he had never seen such a bad
business situation. He discussed the matter with his father who
understood that "we were under pressure". He and his
father tried to "push equipment sales" without any
appreciable success. He tried to reduce expenses but it was
necessary to keep three service employees who were producing cash
for the company. "Without the technicians, you close the
door". So, he explained, he struggled and paid the
technicians throughout January, February, March and April but did
not make any remissions to Revenue Canada. In some cases the
technicians were paid only one half or one third of their regular
salaries. By August 30, 1990 he was "tapped-out" and
had to stop the company's operations. People would not work
for nothing. Various suppliers, such as Bell Canada, were
threatening to withdraw service or product and King required a
source of money to pay the suppliers, if not Revenue Canada.
Customers who paid immediately had been given a discount.
[13] Richard Western declared that there was no "real
decision" not to pay Revenue Canada. He was "more or
less thinking of how to survive and deal with all the
suppliers". In other words, as he presented the situation, a
payment to Revenue Canada meant a supplier would not be paid and
without supplies the company would not survive. He wanted to keep
the company going; he hoped that if he could turn the corner he
would be able to deal with and pay Revenue Canada. He was
constantly thinking how he could get through the adverse
conditions the company was facing and honour the company's
obligations.
[14] On the last day of King's business the company's
bookkeeper came to King's office with various income tax
forms, including forms for wages (T4). The bookkeeper assumed all
the cheques, including those payable to the
Receiver General, had cleared the bank, but this was not the
case.
[15] In cross-examination counsel for the respondent produced
King's bank statements for the period February 28 to April
10, 1990. Richard Western acknowledged that these were typical
bank statements, although the cash flow was declining. The
statements reflect all payments made to employees within the
five-week period. Of the ninety-eight cheques cleared during this
period, twenty-two cheques were made payable to employees
and the balance made payable to creditors. Cheques aggregating
$73,000 cleared the account over the five week period. Cheques
were drawn payable to employees as wages. But no cheque was paid
to Revenue Canada. Richard Western explained that payments were
made to suppliers so the company could sell product. He said if
he did not "stretch things out" by paying minimum
amounts to creditors the company would have terminated at the end
of December 1989.
[16] Richard Western also explained that in some months King
had not remitted in full the amount of source deductions. This
was due to the fact that certain employees were paid a commission
above their salary and King did not withhold source deductions
from payments of commission.
[17] Richard Western stated at all times his objective was to
pay "Revenue Canada as fast as I could and satisfy
creditors with as little money as possible". When he paid
arrears to Revenue Canada in the fall of 1989 he was unable to
pay creditors. After December 1989 he paid creditors but not
Revenue Canada because "things did not improve as
expected".
[18] Roger Western was aware during the last year of
King's operations that the company was in financial
difficulty. He said that during the eighteen months before the
company closed at the end of April 1990 he and his son felt the
stress of a company struggling for survival. He allowed his son
to handle the administration and try to put the company on a firm
financial basis while he tried to save the business by promoting
sales. Roger Western was not involved nor concerned with the
company's requirement to make timely remittances to Revenue
Canada. He said that he was only "now" learning what
the situation was.
[19] Roger Western has a high school education. He also
attended night school to study continuing education courses at
the University of Toronto, where he received certificates in
economics and accounting, and Ryerson College, where he obtained
an electronics certificate.
[20] Roger Western agreed with his son that the business began
to deteriorate seriously after December 1989. Roger Western was
"totally focused on sales". He never discussed the
failures of the company to remit with his son Richard. He was
unable to answer whose decision it was to pay employees without
remitting source deductions to Revenue Canada.
[21] Roger Western conceded in cross-examination that he did
not do anything to prevent failure of King to remit source
deductions to Revenue Canada. He relied on his son and was
"desperately trying to get sales going".
[22] The amount of source deductions not remitted to Revenue
Canada was in the amount of $12,660.03. Richard Western stated
that the company never had the money to remit. In his view he and
his father did everything possible to collect and remit the
source deductions. Some of the examples of the due diligence
exercised by the appellants, according to them, were that they
reduced the company's operating expenses, remitted current
source deductions due in the months of September to December 1989
and tried to generate cash into the company. In short, what they
attempted to do, was to continue the company in operation with
the hope that it would turn a corner and be successful. The
appellants both acknowledge that they did nothing to prevent the
actual failures of the company to remit.
[23] Appellant's counsel argued that King was a small
family run business operated by the two appellants. Roger Western
had a modest formal education; his real education was his
education in life. He was involved in the cash register business
and devoted all of his life to the industry. When he started in
business with his son it was natural for him to do what he knew
best, that is, sales. It was also natural for him to let his son
do what he knew best, that is administration. That his son was
responsible for the administration of the business was not an
abandonment of Roger Western's functions as a director. He
met the standard refused by subsection 227.1(3) by leaving a
function to a person in whom he had confidence. He did what he
thought he could do best, to sell. It was reasonable for a father
to put his faith in his son and a person in comparable
circumstances to Roger Western would have done exactly the same
thing.
[24] Richard Western did not cause King to remit source
deductions to Revenue Canada since this was perhaps the only
way King could continue in business. Richard Western hoped that
in a relatively short run he could turn the business around and
pay Revenue Canada. He was attempting to remedy the failures of
the company to remit and to avoid further failures. He was
exercising a degree of care, diligence and skill to prevent
failures.
[25] Respondent's counsel agreed that this was a small
family run business. The directors, father and son, were in close
contact. Each knew of the company's financial difficulties.
While Roger Western may not have known of the company's
failure to remit source deductions he did know that the company
had a financial problem. He thus had an obligation to determine
if the company was meeting its statutory obligations under the
Act. He did not query his son with respect to anything the
company was doing or not doing and as such he failed in his
statutory duty. Appellants' counsel referred to Stuart v.
The Queen, 95 DTC 537, at 538-539, a decision of
Christie, A.C.J.T.C.C., as he then was. In Stuart the
taxpayer was entirely passive in his capacity as an officer and a
director of the corporation, never asserting himself in that
capacity, and never making inquiries about the responsibilities
of directors. A significant question, therefore, was whether an
individual who consents to being appointed as director of a
corporation can escape liability under section 227.1 of the
Act by, for all practical purposes, ignoring its existence
thereafter. Christie, A.C.J.T.C.C., agreed with Bonner, J.T.C.C.,
in Black v. The Queen, 93 DTC 1212, that there is nothing
in the language of section 227.1 to suggest the existence of a
legislative intention to offer relief to a director who fails to
act because he is ignorant of, and indifferent to, his
responsibilities and those of his company. Roger Western simply
ignored his obligations, duties and responsibilities as
director.
[26] Counsel also referred to Soper v. The Queen, 97
DTC 5407, F.C.A., at 5418 in where Robertson, J.A. stated
that a director has:
... the positive duty to act ... [when he or she] ... 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...
[27] On the basis of these cases, Roger Western is liable
under the provisions of the Act. He was not an outside
director. He was involved in the company's business. He knew
the company was floundering and did not take steps that a
responsible outside director, let alone an inside director, would
have taken.
[28] As far as Richard Western is concerned, he did absolutely
nothing to prevent the failure of King to make remissions.
Indeed, he was the actor who caused the company not to make
remissions. It was his decision that the company not make
remissions. If a director causes a company to continue in
operation knowing full well that the company cannot, or will not,
make remissions of source deductions to Revenue Canada in the
hope that the company will turn around and be successful he or
she is not, in my view, exercising any degree of care, diligence
and skill to prevent the failure that reasonable prudent person
would have exercised in comparable circumstances within the
meaning of subsection 227.1(3).
[29] In their Notices of Appeal the appellants alleged that
the Minister erred in calculating the outstanding balance owed by
King to Revenue Canada. During the course of his
cross-examination, Richard Western was shown several documents
describing how Revenue Canada calculated the balance outstanding
and the reasons. Mr. Western eventually conceded that Revenue
Canada's calculations are correct.
[30] The appeals are therefore dismissed. The respondent is
entitled to one set of costs.
Signed at Ottawa, Canada this 16th day of March 1999.
"Gerald J. Rip"
J.T.C.C.